Breakout Performance: Ironfire Capital

Trading Tax Stiffs the Little Guy

dr.eric.jackson@gmail.com (Eric Jackson) — Fri, 27 Nov 2009 20:22:00 +0000

By Eric Jackson, Senior Contributor

11/27/09 - 11:15 AM EST

Jim Cramer came out earlier this week with the view that he could live with a trading tax that imposed a 0.25% surcharge on any trade made in America. The main reason he cited for being willing to go along with the tax was that he thought it would help the government create jobs.

He said,

"If we do not create jobs in this country we will fall horribly behind all others in the world. I think we will be doomed to permanently low growth, if no growth at all. I believe that it is incumbent upon everyone to sacrifice at this time."

Cramer also said that if sacrifice is needed, people trading stocks can afford to pay such a tax.

While I support Cramer's interest in seeing job creation flourish in America, I completely disagree that the "trader tax" will accomplish this aim. To the contrary, I think allowing such a tax to take root here would accomplish just the opposite. In my view, such a tax would encourage large amounts of capital to relocate outside of America, jobs would be lost (not gained) and total government tax revenue would likely go down.

For a preview of what could happen in the U.S. if this trader tax was imposed, look at Britain. At the moment, the U.K. is in even worse fiscal shape than the United States. Because of that, its Labour government recently introduced additional taxes that specifically target hedge funds' trading profits. Government bureaucrats assumed this was an easy way of generating tax revenue. What they failed to appreciate is that capital has never been more fungible than in today's global market.

London-based hedge funds immediately announced they were relocating to Switzerland in droves, where they would face none of the new taxes levied in the U.K. With those funds go certain administrative and back-office jobs. But more important, ask London bankers how they feel about losing the many profitable revenue streams attributable to doing business with hedge funds that will now be sent to Swiss banks.

The U.K. banks also will likely lose jobs tied to serving those hedge funds. And the U.K. government, in one fell swoop, just lost a host of capital gains, personal income and payroll taxes. Congratulations. An article in a London hedge fund industry newsletter from earlier this week had the headline: "Will the last hedge fund manager leaving to leave London please turn out the lights?"

Should the U.S. impose a trader tax, we'll see a similar exodus of U.S.-based investment firms and hedge funds to locales that don't require such a tax. And, believe me, many jurisdictions will be competing for the tax revenue those firms bring with them.

But this trader tax also will weigh heavily on smaller traders, as well as the big hedge funds. It's not fair that this tax will stick it to the little guy while the big banks got to run themselves like badly managed hedge funds, taking in mom-and-pop deposits and then leveraging up those assets 32-to-1 so they could trade and then lose billions of dollars on bad bets. If these big banks had actually been hedge funds, or smaller traders trading their personal accounts, they'd be gone right now. They wouldn't have been shown any sympathy. They'd be toast. Instead, they get bailed out, made whole, lent money at zero interest indefinitely, and now they get to report record profits for the year. Their taxes aren't raised, but small-time traders have to pay for their mistakes? Come on. The fairness of that escapes me.

Can you imagine if someone like Rupert Murdoch, chairman of News Corp.(NWS Quote), had been running the Federal Reserve or acting as Treasury secretary when the financial meltdown occurred last year? When the banks came running for a bailout, Murdoch (or any business executive) overseeing the taxpayers' money would have said, "Sure, we can arrange for a loan, but I want equity and warrants, I want control over management, and before you guys pay any bonuses to yourselves for the next 10 years, you're going to pay out a special dividend to me first. If you don't like my offer, try to find another U.S. federal government to help you."

I saw a story the other day that FDIC chief Sheila Bair was urging banks to start lending to create jobs. Urging. I thought of Murdoch again. Do you think if he had control of any bank he would "urge" management to take certain actions? No, he'd tell them what he wanted. And at the moment, he'd be telling the banks to lend money instead of stockpiling cash.

Finally, as much as I want to see job creation (as Cramer does), I don't see how paying any more taxes to the government is going to directly lead to creating more jobs. Look at the track record so far. After Congress approved $800 billion in stimulus last year, only 24% of that amount has been spent to date. We have no new jobs -- just slowing job losses. The administration keeps telling us about jobs saved. I can't recall ever hearing that statistic quoted before this year. Wouldn't it be quicker and more immediate if the Fed told the banks -- which they control -- to start lending out money to small businesses again, instead of stockpiling cash and cutting their credit lines?

There is a problem looming on the horizon for the U.S. and all Western countries. Debt as a percentage of gross domestic product is on the rise, big time. The current spending trends, combined with expected lower tax revenue, cannot continue indefinitely. The time to pay the piper will come. As a society, we are going to need to sacrifice in the years ahead. This sacrifice will come through lower benefits due to lower government spending on programs, or it will come from higher taxes.

Personally, I'd rather see less government spending, which would allow taxes to stay lower to spur business investment. This will require politically unpopular decisions, however, and it's not clear that short-term-thinking politicians will have the stomach for that.

If higher taxes are needed, we should all pay up -- not just traders. But the banks who got us in this mess -- and who are still on the government dole while paying themselves record bonuses -- should pay more.

At the time of publication, Jackson had no positions in any stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Paulson is About Performance

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 25 Nov 2009 12:41:00 +0000

By Eric Jackson, Senior Contributor

11/25/09 - 06:02 AM EST

Stock quotes in this article: BAC , C , SHLD

There were two reactions I got to my column last week on Greg Zuckerman's new book The Greatest Trade Ever about John Paulson's $20 billion bearish housing trade in 2007: "He was lucky" and "He won't do it again."

Even though these comments are mostly sour grapes, here's the problem with overanalyzing winners -- for the financial media, potential investors and even money managers, like Paulson himself.

Our society celebrates winners (athletes, politicians and investment managers like John Paulson) and ignores losers. From 1994-2007, in the eyes of many, Paulson was a loser. His hedge fund, Paulson & Co., had mediocre returns during this period. He was defined as a merger arbitrage guy. Because of this categorization, some investors were alarmed by his ideas about betting against the housing market using credit default swaps. Yet, he did -- and we know the results.

John Paulson, hedge fund manager

Although his pre-2007 performance didn't stand out, people who knew Paulson thought highly of him, according to Zuckerman. Investors were often impressed with his understated but effective way of clearly articulating his investment theses.

Post-2007, the perception of Paulson went from career underachiever to seer. He is now celebrated, and his recent stakes in Citigroup(C Quote), Bank of America (BAC Quote) and gold are seen as green lights to other investors to buy.

If Paulson told us tomorrow that Martians were going to invade us next month, there would be a run on Martian army gear.

Yet, this reaction is equally superficial in the opposite direction. We don't care why he thinks gold is a buy or why Bank of America will double in two years. This isn't Paulson's fault. He can't help it. It is the reality that's developed around him while he's gone about his business trying to make money for his investors. It's exactly the same as the heavy attention paid to Warren Buffett's moves.

This is classic "survivorship bias." There were 20,000 hedge funds in the halcyon days of 2007. No matter what the markets did over the next 18 months, five to 10 funds would have had scored 100%-plus returns and been celebrated. If Bernanke had cut interest rates drastically in 2006, maybe New Century would have continued to be a huge moneymaker by issuing subprime mortgages.

David Einhorn would be known today as having the canny intuition to get long that stock (and join its board) in 2006, instead of for calling Lehman's implosion in early 2008. Had the housing boom continued, perhaps Greg Zuckerman's book would be about former Bear Stearns hedge fund manager, Ralph Cioffi. Of course, this didn't happen and, instead, Cioffi is fighting civil charges by the SEC, and John Paulson is the hero.

Survivorship bias leads to celebrating the winners and -- usually -- overinterpreting their moves leading up to their success and trying to apply these actions to future situations. At least no one in the mainstream media has yet called John Paulson "the next Warren Buffett."

Remember Eddie Lampert? That's what Business Week and countless other magazines called him back in 2004. Although many still defend Lampert as smart, his past five years of performance have been very disappointing, and his Sears Holdings(SHLD Quote) investment specifically has been ... early.

Although it's easy to pick on the financial media for these flubs in hindsight, they are merely reflecting our own deep-seated human desires for making sense of a seemingly senseless market. They wouldn't tell us who'll be the next Warren Buffett, unless we wanted to buy their magazine (or click on their links) to find out. We gravitate to "winners" for pearls of wisdom to help us be more winnerlike.

This is why investors "performance chase." The best performing hedge funds (and mutual funds) will always attract the most capital. After all, performance is what it's all about. Most investors will overlook lots of quirks, ethical lapses and hard-to-follow musings about the state of the markets in investor letters, if the money manager performs.

The longer and better he or she performs, the more leash we give him or her (like Madoff) or the more we celebrate him (like Peter Lynch, Lampert and now Paulson). But past performance (and a fund's ability to raise capital) is no guarantee of future success.

Investors should judge money managers on their current ideas. If you'd done so when John Paulson made his argument for why to bet against housing in 2006 and 2007 -- despite the fact that he wasn't a "housing guy" -- you made a lot of money. His pro-gold and pro-financials views now should be also judged on their merits, not because "John Paulson thinks so." Of course, you and I will probably never have the chance to place money with Paulson. So this lesson becomes even more important. How are you going to know the next John Paulson when you bump into him or her?

Finally, let's turn to the critique of "Paulson will never do it again." Most people assume that smart people will, over time, outperform their peers. This is true. Yet, we also know smart people drove Enron, WorldCom and Lehman Brothers off cliffs -- all companies that, before their collapses, had been celebrated in the financial media with books written about them "getting it" while their competitors didn't. How can this happen and how can Paulson avoid this fate?

Michael Burry, a doctor-turned-hedge fund manager also profiled in Zuckerman's book, who also profited from betting against housing despite great protestations from his investors, had a memorable line: "A money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect."

Paulson's gone from obscurity to being perceived by many as the top hedge fund manager in the world. With that change, Paulson has received enormous wealth, but at a cost. His every trade gets discussed and debated in the media. He's likely become more isolated for security reasons, making it harder to relate to the "real world" in which his investments operate. And he likely has more "yes men" around him than ever before.

If you're on Paulson's team, you've made huge money recently. Unwittingly, you'll start agreeing with him more on his new investment ideas. Anyone who doesn't agree will probably leave on his own accord or be asked to leave. Those remaining on the team are the most loyal and the least likely to disagree with the boss' views. Active debate helps form great investment ideas. But, as money managers get more successful, they face less and less debate.

I disagree that John Paulson was lucky in betting against housing. From Zuckerman's account, Paulson did his homework, while everyone else stayed too long at the party. I also think that he can still conceive of and execute great trades. But there's no question that it will be more difficult now than before . Ask Lampert. Paulson's continued success is not his birthright.

Any investor choosing a money manager needs to remember the story of the emperor's new clothes. Managers like to dazzle investors with technical terms and fancy charts. However, they should be able to clearly and articulately explain their basic strategy. No amount of buzz or press clippings is an adequate substitute for clear-headedness. (In fact, if they seem overly concerned with their media appearances, this signals they care more about their image than managing your money.) You shouldn't worry about asking a stupid question. If they show a whiff of arrogance in responding to your questions, run away as fast as you can.

Answering these questions will help you skate to where the puck's going, not where it's been. It will also help you ensure differentiating between "flash in the pan" money managers from those with staying power. And, just maybe, you'll find the next John Paulson.

At the time of publication, Jackson fund held no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Stock Focus: Red Robin Gourmet Burgers

dr.eric.jackson@gmail.com (Eric Jackson) — Mon, 23 Nov 2009 14:45:00 +0000

By Eric Jackson
TheStreet.com Senior Contributor
11/19/2009 1:15 PM EST
Click here for more stories by Eric Jackson

One of the more surprising sectors of 2009 has been casual dining restaurants. At the start of the year amid concerns of consumer deleveraging, some analysts were expecting a prolonged battering of any stocks with consumer discretionary exposure. Yet restaurants have held up very strongly, especially snapping back from the March lows. It turns out Americans like eating out -- even when times are tough -- and I've identified a stock poised to benefit from the casual-dining trend.

The Powershares Dynamic Food & Beverage (PBJ - commentary - Trade Now) ETF is up 9% for the year, but many specialty restaurant chains have far outpaced that. PF Chang's Bistro (PFCB - commentary - Trade Now) is up 53% so far this year, and Buffalo Wild Wings (BWLD - commentary - Trade Now) is up an even more impressive 64% year to date. The well-regarded restaurant conglomerate Darden (DRI - commentary - Trade Now) is up a more modest 15% YTD (after a very strong recovery in the spring that has since tailed off).

Rather than recommend one of these names and risk chasing performance, I'm going to discuss a restaurant stock that's been tossed in the markdown bin: Red Robin Gourmet Burgers (RRGB - commentary - Trade Now).

Red Robin focuses on high-end burgers and fries, but it's still burgers, so the average check size for families is extremely low ($11.57 in the last quarter). The company has more than 430 restaurants in the U.S. and Canada. Its primary competitors are the general chains Applebee's (owned by DineEquity (DIN - commentary - Trade Now)), Chili's (owned by Brinker (EAT - commentary - Trade Now)) and TGI Friday's.

First, let's discuss the positives of a Red Robin investment. This is a valuation story: The stock is down more than 6% for the year after disappointing on its two most recent earnings calls. The stock is simply too cheap relative to its peers. Its forward P/E ratio is currently at 11 times, while other specialty chains (which Red Robin is) like Buffalo Wild Wings and PF Chang's sport forward P/Es at 17 to 20 times. Brinker and DineEquity have forward P/Es of 11.5 times, but they are both generalist chains.

Red Robin hasn't run heavy discounting to lure customers over the last six months, as Brinker and DineEquity have done, so cash flow has held up well. The company has generated $91 million in cash flow over the past 12 months, compared to $152 million for DineEquity (which also includes IHOP in those numbers) and $287 million for Brinker (which also includes several smaller chains besides Chili's), but DineEquity and Brinker are two and four times the revenue size of Red Robin, respectively. Many analysts expect Red Robin will have an easier time keeping its prices higher going forward relative to competitors who have heavily discounted.

Red Robin has also generated this cash flow growth in the face of falling traffic over the past two quarters. The company has done little marketing over this time period, a negative that has hurt sales and margins, but management will presumably correct this deficiency in the months and quarters ahead. If sales rebound, Red Robin's earnings will go up at an accelerated pace. Its competitors have continued heavy spends on marketing throughout the year, so I expect Red Robin to see a much greater return on its incremental marketing dollars spent in the next year compared to those peers.

As for the risks, Red Robin's management appears to be weak, especially the vice president of marketing. I have no clue why the company would just shut off the marketing valve over these past six months with no plans to increase this spend until new product rollouts in February. This value stock will be a falling knife until it proves to the market that dropping sales have bottomed and are rebounding. At the moment, you're taking a bit of a leap of faith, and that's dangerous. I would be more comfortable with some clear marketing direction from the company. At the moment, that's this company's biggest hole, and CEO Dennis Mullen owns that weakness until he corrects it.

Unlike many other specialty casual dining chains, Red Robin carries debt: $200 million worth. Perhaps it's that debt that is causing them to penny-pinch on marketing. It's a manageable debt load, especially with the company's strong cash flow, but it puts even more pressure on this management team to perform.

Additionally, I also was left scratching my head following the last earnings call about managing commodity costs. Commodities are generally way down from a year ago, and just a few days prior to the Red Robin third-quarter call, Texas Roadhouse (TXRH - commentary - Trade Now) announced an earnings beat that it primarily credited to declining commodity costs. (Texas Roadhouse's stock has jumped 15% since that announcement.) Red Robin, whose commodity-use profile is very similar to that of Texas Roadhouse, announced that gross margins were flat sequentially, although it alluded to the prospect of commodity costs declining in the next couple of quarters as some contracts roll over.

The bottom line is that I expect Red Robin's management team to start aggressively marketing again relatively soon and to benefit from an uptick in resulting traffic and those expected declining commodity costs. After two recent quarterly misses, the company is certainly due for an earnings beat and a surge in the stock price. Investors might have to wait for the first-quarter call before that happens, but a long position now in an unloved stock like Red Robin will likely be rewarded over the next six to eight months.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Red Robin Gourmet Burgers and DineEquity to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Jackson's fund had no positions in the stocks mentioned. Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

The Lessons of John Paulson & The Greatest Trade Ever

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 18 Nov 2009 12:13:00 +0000

By Eric Jackson, Senior Contributor 11/18/09 - 06:00 AM EST

Stock quotes in this article: C , GS

If it wasn't clear already that John Paulson had reached the zenith of his hedge fund profession, one only had to watch how fervently the media and blogosphere digested the news of Paulson & Co.'s quarterly holdings which was released last Friday.

Market commentators immediately pounced on how the one-time housing bear had loaded up on 300 million shares in Citigroup(C Quote) during the quarter, while dumping his entire holdings in Goldman Sachs(GS Quote).

Similar 13-F holdings of other hedge fund managers like David Einhorn and George Soros filed with the Securities and Exchange Commission in recent days have been summarily ignored compared to the reaction to Paulson's. (Citi shares jumped 3.2% the day after Paulson's announcement, far outpacing the S&P and Financial index that day.)

As far as hedge fund managers go today, John Paulson is the man. Ken Griffin, Stevie Cohen, and Eddie Lampert and others are afterthoughts.

In Gregory Zuckerman's new book, The Greatest Trade Ever, the Wall Street Journal reporter chronicles how Paulson mounted his ascent from nobody to this industry's seer of the moment.

Seven years ago, Paulson was relatively unknown. He was a merger-arbitrage guy running $300 million dollars. The former Baker Scholar from Harvard Business School couldn't help but feel that - in his mid-40s - he had under-achieved his career potential.

A key analyst alongside Paulson was Paolo Pellegrini. A failed Lazard banker with two divorces and zero net worth at the time he joined Paulson, Pellegrini had to make this last career chance work.

He lived in a one bedroom apartment up in Westchester and would arrive at work at 6:30 am in order to get the cheapest parking lot rate nearby. No one seemed to like him at first. He was a bit of a hot-head and talked too much. Yet, eventually he helped identify the housing bubble that Paulson would turn into a $16 billion winning trade for his firm and $4 billion for Paulson.

Beyond the interesting outsider-type characters working at Paulson, Zuckerman's book offers many lessons for small and large investors. One is the risk, but potential reward, that comes from breaking away from the herd mentality that surrounds Wall Street.

Nobody on Wall Street gave these guys a chance, when they started betting against housing. In fact, Paulson was routinely laughed at. Because the banking infrastructure was making so much money off of housing in 2004 - 2006, there was no reason for so many people to imagine it would end.

Even among hedge funds -- who are paid handsomely to anticipate and invest in where the puck is going, not where it's been -- precious few made this bearish trade. At the time, wise managers saw only the obstacles to the trade working out (like the federal government bailing out sub-prime borrowers and "containing" the problem from other parts of housing) and they clung to a misplaced blind trust in "their models" which showed housing couldn't decrease in value.

Even after he makes the bet, Zuckerman points out how there are so many times that people tell Paulson to take the bet off or cash in his profits too early. His own investors complained. Complaints also came from brokers from Bear Stearns and others who helped sell him the credit default swaps on the toxic tranches of mortgage bonds, as well as the most troubled sub-prime lenders and banks holding the troubled securities.

Even his own staff complained that he wasn't taking money off the table. They told him to sell when he was down in his trade and they told him to sell when he was up on the trade after New Century reported its first blown quarter in early 2007. Through it all, Paulson stuck to his guns because he foresaw even bigger profits ahead - and he was proved right.

As a fund manager, I often ponder the challenge of balancing between (1) trusting yourself and your investment thesis completely even when no one else does and (2) being aware enough to know when you're being too stubborn and "not seeing the facts" or when the trade is going against you.

In Paulson's case, every new bit of data which came to light and possibly contradicted his investment thesis was always scrutinized by him and his team to see if they had "missed something." He always stuck with the trade because he felt confident in the depth of research they had invested in understanding the problem/investment opportunity.

For Paulson, it all boiled down to one chart which Pellegrini produced showing the inflation-adjusted growth in housing prices over time divided by wage growth. The data clearly showed a rapid explosion upward away from the general trend starting in 2000. He assumed this trend would not continue indefinitely and revert (even overshoot). He was right.

The Greatest Trade Ever isn't just about John Paulson. It describes some smaller players who also bet against housing. Their stories are also very interesting and some of the characters are really colorful and interesting. Some run into the problem of not having enough capital to implement the trade to the degree they want to. Some wait too long.

One investor, Michael Burry, got his break as a fund manager when well-known value investor Joel Greenblatt made a big investment in him. Later, after taking a big bet against housing early on, Burry faced Greenblatt's wrath. In no uncertain terms, Greenblatt told him to get out of the trade. Burry didn't but not without taking a huge mental and physical toll on himself. Put yourself in Burry's shoes. What must it have felt like to tell your maker to take a hike?

There are several lessons in The Greatest Trade Ever for investors: believe in yourself (assuming you've done your homework), be skeptical of others' free opinions and assumptions, persist, and take the long view and don't take profits too early.

Every investor involved in this bearish housing trade early on referred to it as their potential "Soros trade" - referring to the famous 1992 bet against the British pound which netted Soros' fund $1 billion.

Paulson used this line himself, but he also remembered another Soros comment that stuck in his mind as he executed his trade. When you see the perfect trade set-up in front of you, Soros advised to "go for the jugular." Paulson did and it paid off big-time. Some of us will never see a trade like that for the rest of our lives. When opportunity knocks, you have to answer.

At the time of publication, Jackson's Fund had no holdings in any of the equities mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

A Closer Look at Executive Compensation

dr.eric.jackson@gmail.com (Eric Jackson) — Mon, 16 Nov 2009 14:00:00 +0000

By Eric Jackson
From RealMoney.com
11/13/2009 1:59 PM EST
Click here for more stories by Eric Jackson

We read a lot about corporate governance and executive compensation these days, in the wake of last year's economic collapse. Many politicians are now jumping into the fray, saying we need to legislate certain governance requirements, such as splitting the roles of CEO and chairman or lowering CEO pay. Although philosophically I support many of these arguments, it turns out that many of these prescriptions have no long-term relationship with an increase in a company's stock price. Which of these governance and executive pay factors should you pay attention to as an investor?

As any good investor knows, there's no silver-bullet metric (such as P/E ratio or price-to-book or leverage ratio) that, on its own, predicts a stock future increase or decrease. Even if you take a number of internal factors into account, your perfect analysis can be thrown out the window by an industry downturn or some random comment by Tim Geithner on his trip to Asia.

With this in mind, I believe you can improve your investment batting average by paying attention to two factors relating to corporate governance and executive compensation that most people overlook.

Two Kinds of Insider Stock

First, how much stock do the company's directors own? In a big long study I took part in several years ago, we scoured company's proxy statements and examined how a bunch of so-called "good" corporate governance factors were actually linked to longer-term stock returns. Almost all of them (such as whether there was a split CEO and chairman, or if the board had a number of "independent" directors or not) had no correlation with stock price increases. However, we found one variable that had a whopping link: whether a company had a lot of directors who had dug into their own pockets and actually bought stock in the company. This is different from a case in which stock ownership in the company was only due to stock grants or stock options.

When we talked to directors about this finding, they said it didn't surprise them. It's the difference between having "found money" on the line (i.e., their stock was paid for from other people's money, not theirs) instead of their own. One director said, "I sit on a lot of boards right now, but there's one where I've got about $250,000 of my own money on the line. It sounds bad to admit it, but I care a heck of a lot more about how that company does. I lose sleep over it."

If you were a shareholder in that company, his sleepless nights are probably comfort to you. I bet there are many Bank of America (BAC - commentary - Trade Now) and Citigroup (C - commentary - Trade Now) shareholders wish they'd had more directors losing sleep (and their own money) a couple of years ago.

Payments to the Chief

The second characteristic I like to look at is the total compensation the CEO and his/her management team take home. Is it significantly above other companies in that industry, even though the stock returns between the companies over time is not different? If so, that's a big red flag. Why does this management team (and the board members who approve their pay packages) think they're worth so much more than their peers, with no commensurate better historical track record?

As part of total comp, you should also look out for extreme executive perks that have been thrown in to supplement an executive's already high salary. I mentioned recently a Las Vegas Sands (LVS - commentary - Trade Now) senior vice president, Rob Goldstein, who got the company to pay $364,000 to remodel his home and never had to pay it back. Mark Hurd and his senior management team at Hewlett-Packard (HPQ - commentary - Trade Now) saw their total compensation double last year, after they imposed 10% to 15% pay cuts across the organization. The H-P execs also get to spend hundreds of thousands of shareholders' dollars jaunting around the country on the H-P corporate jets for personal use, with hotels and meals also covered for personal use.

I've heard some people say, "Who cares about the perks? Shocking that there's gambling going on in the casino. Come on." I disagree. Not every CEO or management team does this. It says something about how they approach executive decisions. To me, it tells me that they will look for every chance to make decisions that benefit them first and foremost before the shareholders. I don't want to invest in a company like that. (Maybe not surprisingly, I currently have short positions in LVS and HPQ because of many factors, but the perks factor certainly played a role in my decision.)

So how do you find this information? It's easy: go to the SEC's Web site. Search "company filings" and look for the company's most recent proxy statement. Its technical filing name is "DEF-14A," which stands for the company's definitive proxy statement. In there, you will find info on who is on the board of directors, how much they're paid, their bios, and how much stock they own in the company. It's not always immediately obvious how much of their current stock ownership is from past stock grants and stock options given to them (for free) vs. how much they've bought themselves, but it can be figured out if you look over a number of these past filings.

In the same filing, you'll find everything you've ever wanted to know about how much in total comp the management team is making (and more), down to the often most illuminating footnotes. The SEC is often tinkering with its requirements on companies in how they present this data. However, the current version makes it clear what each exec's total comp is.

These two characteristics of outside directors' stock ownership in their companies and the size of CEO total comp and executive perks aren't silver bullets. They should supplement all the normal financial analysis you do. However, they can often be very helpful in deciding whether to proceed with an investment or not.

At the time of publication, Jackson's fund held a net short position in LVS and a short position in HPQ. Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Free Market Capitalism Needs Clear and Enforced "Rules of the Game"

dr.eric.jackson@gmail.com (Eric Jackson) — Thu, 12 Nov 2009 03:42:00 +0000

Appreciate all the Seeking Alpha comments I've received on my article on "It's time to champion real free market capitalism."

Several have said that "real" free market capitalism should have no government involvement.

First, I don't believe that either Friedman or Rand would agree with that statement.

See this clip of Ayn Rand and Mike Wallace from 1959 (watch all 3 clips but the business/free market aspects are in the 2nd clip of the interview).

Wallace specifically asks her if all she cares about is protecting the "robber baron" (i.e., monopolist or oligopolist) capitalists. She clearly says she doesn't want to see monopolies and is favor of breaking them up. She also, of course, played an influential role in the 1st term of the Reagan administration when they (among other things) broke up Ma Bell.

I am not sure she wouldn't have supported keeping Glass-Steagall or breaking up Too Big To Fail Banks.

Friedman and Rand clearly saw a role for government for police, defense, and our legal system. Clearly, an extension of those agencies would touch business. After all, why else would she support the break-up of AT&T?

But let's all -- as proponents of free markets -- think for ourselves instead of only speculating about what Rand would have thought. After the last 2 years, to me, it's clear that government's primary role in relation to a healthy free market system is to set and enforce the "rules of the game" such that the entire game isn't at risk of stopping... as it almost did last year.

Rules of the game means preventing monopolies that inhibit choice. It means -- to me, and I don't care what Friedman or Greenspan used to think on this -- you prosecute no-talent fund managers who cheat their investors by illegally trading on insider information. It means giving shareholders -- the true owners of the corporation -- the right and freedom to toss out under-performance directors.

On the other hand, I don't think the government should be setting pay, deciding that Bear should get bought and Lehman should go under. They also shouldn't be saying that more sub-prime borrowers have the right to own a home as part of "the American Dream."

Strong "rules of the game" set and enforced by the government allows 'real' free market capitalism -- and they would have the secondary benefit of also removing crony capitalists who have stopped competing on ability and instead compete on lobbyist dollars spent.

Risk of Snake Eyes for Las Vegas Sands

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 11 Nov 2009 15:00:00 +0000

By Eric Jackson

TheStreet.com/RealMoney

11/10/2009 2:36 PM EST

With its stock price is up over 800% since its March lows, Las Vegas Sands (LVS - commentary - Trade Now) plans to raise up to $3.3 billion in a Hong Kong IPO listing of its Asian assets later this month. While it has great potential upside from its properties in gambling territory Macau, there are still a number of risk factors facing the casino that could cause it to trip its debt covenants on its massive $12 billion in liabilities over the next 18 months. Because of those risks and lax corporate governance oversight, I've initiated a short position on the stock. Here's why.

Risk 1: Losses will persist without a meaningful upturn in operating performance. Despite a surge in Macau-based profits and management claims of cutting $500 million in operating costs from the business, Sands still is losing money, and at an increased rate year-on-year. It had over $1 billion in operating expenses in the recent quarter alone. The bet that bulls on the stock are making is that we've hit bottom and that rooms, banqueting and convention revenue will all come back from current levels. On the recent earnings call, management noted that Macau had done particularly well recently, partially because of increased traffic over the October Golden Week holiday. The company pointed out that Las Vegas room bookings were up for January and February. However, the likelihood of a continued soft market in Vegas (especially with MGM's new CityCenter dumping 5,000 new rooms on the strip next month) seems high, even with Macau. It appears reasonable to assume that losses will persist over the next two years, at a time when it's vital for LVS to navigate its way through its debt obligations.

Risk 2: Debt requirements will only get tighter over the next year. Like its losses, Las Vegas Sands' debt and liabilities have increased over the last year. It had $12 billion in debt as of the end of September -- up 13% from a year ago. LVS's biggest risk in holding such a high amount of debt while losing money is meeting its debt covenants, which include tightening the allowed ratio between debt and EBITDA, currently at a ceiling of 6.5:1 for US-related debt. Management says it is now running a ratio of 5.78:1. Starting July 1 2010, the allowed ratio will drop to 6:1. Then, on January 1, 2011, it will drop again to 5.5:1 and stay there.

Sands has been able to sell stock and debt in order to supplement its EBITDA and stay within its debt covenants. Recently, it pre-sold $600 million in projected proceeds from the planned Hong Kong IPO of its Asian assets later this month, presumably because it needed the extra cash early. Once it completes its public offering, it should receive another $1.7-2.5 billion (net of the already-sold $600 million and the bankers' underwriting fees).

The company has three types of debt related to its US, Macau and Singapore (Marina Bay) developments and operations. All senior debt is held by Lehman Brothers Commercial Paper (or affiliated entities). It appears that Alvarez & Marsal (overseeing the wind-down of Lehman) is now in charge of Sands' debt obligations and they have more incentive to play hardball on enforcing terms compared to a troubled Citibank, Bank of America, or Wells Fargo. In an interview with CNBC in July, Bryan Marsal talked -- in general terms, not specifically about Las Vegas Sands -- about how many companies were in phase one of a three-phase discussion with their creditors: (1) extend and pretend (that they will somehow be able to bounce back in order to re-pay their debts), (2) amend (the terms of their covenants -- or at least try), and (3) send (as in, send in the keys for the properties to the creditors).

If Sands defaults on one debt obligation, it triggers a cross-default across all its debts. Assuming the losses continue, its new IPO proceeds will help, but the company will still face potential problems later next year, as its debt-to-EBITDA ratio ratchets down.

Risk 3: Continued development in Macau. According to its most recent 10-Q, Sands estimates it will need approximately $2.6 billion to complete development at Macau. It currently has about $3 billion in cash (about the same level as a year ago), plus the new funds coming in from the Hong Kong IPO. It's likely that Sands will need to keep a certain amount of cash on its balance sheet to satisfy its lenders. This means that, even using all the IPO proceeds, Sands will not necessarily have sufficient cash to finish off Macau -- if losses persist.

Las Vegas Sands is required to finish completion of Parcel 3 of the Cotai strip by mid-2011, or risk passing over the keys to all of its Macau assets to the Chinese government. It also needs to build out parcels 4 to 8 (and receive permission from the government), but not as quickly. It is obviously trying to do everything it can to minimize its development costs (right out of the "extend-and-pretend" playbook). Sheldon Adelson is known for slipping delivery deadlines.

However, there are a number of Macau risks (let alone Singapore) that remain, including the potential for less strong traffic in current and future quarters compared with the recent Golden Week-aided quarter, restrictions on travel to Macau by the Chinese government for fear of over-gambling, Sands's need to spend more on ferry access or face reduced traffic, potential cost overruns on existing development and any potential health scare (like heightened concern about the H1N1 virus) that could reduce traffic. Taken together, it seems likely that one or two of these risks might occur in the next year, with a sharp impact on the stock.

Risk 4: Poor corporate governance oversight. You would think that Sands would be holding on to every dollar of cash possible, seeing as how the stock dropped from $140 to $1 and was being questioned as a going concern less than a year ago. But, you'd be wrong. Corporate governance has and likely always will be very poor at this company. On October 29, Sands declared a quarterly dividend of $2.50 per share to the holders of 10% Series A Cumulative Perpetual Preferred Stock. It's not clear how much of this stock Chairman and Chief Executive Sheldon Adelson himself owns, but we know (from the Sands 2009 proxy statement) that his wife, Dr. Miriam Adelson, bought 5.25 million of these shares from the company on November 14, 2008. That means Adelson's wife will collect $13 million on just this one quarterly dividend payment, or $50 million annually -- roughly 10% of their recent $500 million in total cost savings Sands management boasted about.

My personal favorite egregious expense at Las Vegas Sands involves SVP Rob Goldstein. Goldstein is in charge of Sands' Vegas properties and was front and center on the recent earnings calls. He was paid $3.8 million in total compensation in 2006, $3.2 million in 2007 and $2.6 million in 2008. In the spring of this year, in its proxy statement, Sands disclosed that: "During 2008, a subsidiary of the Company performed work at a home owned by Mr. Goldstein, the Company's Senior Vice President. The Company's cost and overhead for the job was $364,000. Mr. Goldstein believes and the Company agrees that some of the work was not performed in an appropriate manner. The Company and Mr. Goldstein are working together to determine the amount that may be due."

Later, in its second-quarter10-Q release in August, Sands buried in the back under "Other Matters" the following: "As previously disclosed, during 2008, a subsidiary of the Company performed work at a home owned by Robert G. Goldstein, the Company's Executive Vice President. Mr. Goldstein believed, and the Company acknowledged, that some of the work was not performed in an appropriate manner. The matter was referred to an independent expert, who concurred about the quality of the work and concluded that Mr. Goldstein should not be obligated to pay the $0.4 million incurred by the Company for costs and overhead on the job. These findings have been accepted by the Company and Mr. Goldstein."

So, to review, a Sands subsidiary got to do $360,000 worth of remodeling construction work on Goldstein's house - paid for out of the Sands' shareholders' coffers and Goldstein gets to enjoy the benefits of the work for free. Who is this "independent expert" and how can I arrange for him to come and adjudicate some faulty remodeling work paid for by Sands at my house?

Clearly, it's "buyer beware" for shareholders at Las Vegas Sands, and Sands makes no bones about it. One of its "risk factors" listed in their 10-K is that "[t] he interests of Mr. Adelson may conflict with your interests."

The bottom line is that Las Vegas Sands' management is betting that the Macau market will stay hot and that Vegas will come back from historic lows this year. My belief is that one or more of the risks cited above will surprise to the downside within the next year - and that's why I think it's more likely the stock will go lower than this, rather than higher, over the next 12 months.

At the time of publication, Jackson's fund held a net short position in LVS and a long position in WYNN.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

It’s Time to Champion Real Free Market Capitalism

dr.eric.jackson@gmail.com (Eric Jackson) — Tue, 10 Nov 2009 18:36:00 +0000

By Eric Jackson

November 10, 2009

Market commentators and the White House have been quick to blame last year’s economic meltdown on a free market run amok. And they’ve used that false assumption to justify their unprecedented response of government intervention and increased regulation.

But we’ve never really had free market capitalism in this country. The last 30 years of America’s market system is better described as “mixed crony capitalism” – one part capitalism, one part government intervention through various programs, and one part corporate cronyism where officers and directors of big businesses pay themselves more, lobby politicians on both sides of the aisle and gain more power through favorable governmental regulations including mergers.

In such a three-way shared system, it shouldn’t surprise anyone that true free market capitalism always appears to be outnumbered by the interests of the government and corporate cronies.

For example, despite the billions in taxpayer dollars that have helped prop up a slew of “too big to fail” banks, and unprecedented government ownership of them, the powerful bank lobby has somehow convinced the current administration that little needs to be changed about how those banks operate. It’s as if the bankers and politicians are saying “let’s just call last year a mulligan and move on.” Not surprisingly, most of the CEOs and directors the banks that drove their institutions over a cliff are still in place.

If Standard Oil or Ma Bell existed today, it’s hard to imagine there would be the political will to break them up. Instead, politicians and their corporate donors would argue that what’s good for Ma Bell, GM, Bank of America, Citibank, or any other company is good for America. Politicians would never support programs that curtail spending, because it would give them nothing to go back home and talk about to get them re-elected.

There are many critical thinkers arguing why even more government intervention is needed today than ever before. Unfortunately, there are no critical thinkers arguing why our system needs more emphasis on free markets with clear “rules of the game” and less state involvement in our economy and less protections for corporate cronies. This paucity of ideas is something that greatly troubles me and other investors I know.

Milton Friedman and Ayn Rand are no longer around to argue for their vision of free market capitalism. Instead, we only hear alarmist libertarian rantings of Ron Paul or populist sloganeering to “keep the government out of our business” providing no clear direction for what changes should take place.

We need a renewed focus on the ideas of individual choice championed by Friedman and Rand. Both argued for a free market system built by entrepreneurship and small business and against abuse of power by “robber baron” CEOs. Government’s role in their eyes should be limited to police, defense, and the legal system. The importance of a market system following enforced rules is critical. The ideal market system the US should be striving to attain here is not Russia but Hong Kong.

The economic problems are country face are great, but they won’t improve by further deteriorating our federal balance sheet by short-term spending and tax breaks. Instead, we need to:

· reduce excessive government spending and restore fiscal balance to the federal and state governments

· break up companies that are “too big to fail” including the big banks

· force over-leveraged banks to undergo debt-to-equity conversions that allow them to get credit out to real entrepreneurs sooner

· bring back Glass-Steagall that separates commercial and investment banks,

· prosecute insider trading and other white collar crimes when they occur,

· get the government out of the business of setting executive pay in favor of giving shareholders more direct powers to remove directors not doing this appropriately and

· eliminate special tax breaks for homeowners and cars which only prolong the pain of an inevitable correction until later.

The heroes of free market capitalism are the entrepreneurs who create real value and real businesses. Those people are the antithesis of “fat cat” capitalists who ensconce themselves in money, power, with government protection. We need more people championing well articulated pro-market, pro-entrepreneurship policies in Washington.

Eric Jackson is Founder and Managing Member of Ironfire Capital and the General Partner and Investment Manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Bryan Marsal on the Unwinding of Lehman Brothers

dr.eric.jackson@gmail.com (Eric Jackson) — Sat, 07 Nov 2009 05:19:00 +0000

Enjoyed this interview from July 09 with Bryan Marsal of Alvarez & Marsal on the unwinding of Lehman Brothers:

What Galleon Teaches Us

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 04 Nov 2009 12:54:00 +0000

By Eric Jackson
11/04/09 - 06:00 AM EST

Stock quotes in this article: AMD , INTC , IBM

The government's case against Raj Rajaratnam, founder of hedge fund Galleon Group, on the charge of insider trading alleges that the hedge fund manager's primary competitive advantage for investors was a web of connections close to or inside technology companies feeding him illegal tips on future directions of the companies' stock prices.

What's shocking is how Rajaratnam is accused of having, over at least 10 years, cultivated a network of insiders feeding him nonpublic information about future earnings announcements from public companies like AMD(AMD Quote) (including its former CEO), IBM (IBM Quote) Intel(INTC Quote) and some of their most prestigious advisers like McKinsey & Co.

Why would so many bright, high-ranking people at such successful companies get caught up in such activities? Perhaps they craved access to a man whom Forbes recently ranked as the 262nd richest American, worth $1.8 billion and in the top 40 of hedge fund managers.

In a recent PBS "Frontline" episode on Alan Greenspan, the program made the allegation that the former Federal Reserve chief and acolyte of free marketer Ayn Rand had once joked with former head of the CFTC, Brooksley Born, that the two of them would never get along because she believed in prosecuting capital markets crimes and he didn't. He supposedly went on to explain that his strong faith in free markets made him believe that it was unnecessary to go after white-collar criminals through any kind of enforcement program.

Instead, Greenspan believed that market participants would ferret out ill-gotten gains and punish those people for their crimes by starving them of future capital. Such efficiencies would likely occur before the governmental regulatory body even knew something nefarious was going on.

Although I'm a proponent of unencumbered free markets, this point of view, whether Greenspan held it or not, is laughable. Bernie Madoff has blown this argument out of the water. And now we have the case of Rajaratnam, his decade old hedge fund, and his alleged 10 years of generating alpha through profiting on illegal insider information.

As a hedge fund manager, I look positively on this development. If illegal activity is going on by fund managers, it deserves to be highlighted and prosecuted. Investors will learn to ask tougher questions as part of their due diligence, and capital will ultimately flow away from managers posting false performance numbers to those who are truly generating alpha.

The hedge fund industry has to be one of the most Darwinian industries of any in the world. You don't get to keep your job by being the boss' son or being friendly with the right managers above you. You get to keep your job (and paid well if you do it consistently) by beating the market. You lose your job otherwise.

Perhaps because of the big potential rewards for success, it shouldn't be surprising that some aspiring and existing managers would try to bend the rules to get or stay on top. What this case shows is that ethical managers and investors are better off with a strong enforcement office at the SEC. The industry itself is not going to highlight the next cheater and investors -- even very sophisticated ones -- cannot do this themselves.

I know many hedge fund managers who've expressed mixed feelings about the Galleon case. They're happy that illegal activities by their competitors are being halted, but they worry the case will inspire more unnecessary red tape and heavy-handed oversight. The SEC is faced with a challenge in keeping ahead of the latest and greatest tricks employed by some managers to gain a performance edge.

However, the agency appears to have been pretty creative in coming up with some ways of identifying and tracking alleged illegal behavior in the Galleon case. Hopefully, it will begin to hire more people in the enforcement division with real-world Wall Street experience and not just more bureaucratic lawyers, as was criticized by Harry Markopolos in the Madoff case.

There's been a lot of discussion of getting hedge funds to register with the SEC as an important way for the agency to keep tabs on the potential risk these funds pose to the financial system. It's important, therefore, to realize that Galleon was registered -- its assets under management at one point last year topped $3 billion. More budget resources targeted towards enforcement would be taxpayer money better spent than registration for registration's sake.

Finally, a word of caution on the Galleon case. Although criminality ought to always be prosecuted to the fullest extent, Galleon and Rajaratnam deserve the right to defend themselves in court. What if they are innocent, after having announced they would be winding down the firm two business days after news of the arrests first broke? Could they ever truly be made whole by the SEC if that happened? That Orwellian possibility should send shivers down the spines of hedge fund managers everywhere.

Mark Cuban has never run a hedge fund, but what if he had when the SEC came after him last year for purportedly trading on insider information in the small-cap stock Mamma.com? If he'd had a hedge fund at the time, it likely would have also had to be wound down when details of his arrest first emerged. The SEC later dropped the charges, although it recently made some noise about bringing them back.

Wrong-doing deserves to be regulated and prosecuted by the SEC. The government should devote more resources to enforcement with the best qualified people involved. A few correct convictions will have a ripple effect throughout the hedge fund industry and discourage illicit behavior.

However, the SEC needs to realize it is playing with people's lives and livelihoods here. Investors will -- understandably -- redeem first and ask questions later when the agency launches actions against a fund or fund manager. They have a responsibility to do their jobs to the best of their abilities, as do hedge fund managers and senior executives within public companies.

Jackson's fund holds no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Evan Bayh: Hypocrisy on the Public Option

dr.eric.jackson@gmail.com (Eric Jackson) — Thu, 29 Oct 2009 00:38:00 +0000

By Eric Jackson
10/28/2009 3:57 PM EDT
Click here for more stories by Eric Jackson

Evan Bayh, the junior senator from Indiana, is in the middle of a heated debate in the Senate on whether a public option should be included as part of President Obama's health care reforms. An organizer of a group of so-called Senate Blue Dog Democrats, to date, Bayh's been a staunch opponent of any changes to the status quo in this debate.

He's worried aloud that any public option would be a nod to socialism and counter to his principles as a fiscal conservative. When pressed on the issue, he's said he's simply a vessel reflecting the views of his Indiana constituents.

Yet Bayh, who until very late in the campaign last year was considered a top contender to be Obama's vice president, is at best naive and disingenuous, and at worst supremely hypocritical in pushing his views as those of his voters.

His wife, Susan Bayh, sits on the board of WellPoint (WLP - commentary - Trade Now) in her hometown of Indianapolis. Over the last six years, Susan Bayh has received at least $2 million in compensation from WellPoint alone for serving on its board.

She joined Anthem Insurance (the precursor organization to WellPoint) in 1998, when she was 38 years old and a midlevel attorney working for Eli Lilly (LLY - commentary - Trade Now). Her work experience prior to her stint at Lilly was five years as a junior law professor at Butler University in Indianapolis. Her work background at the time she was appointed to the Anthem board would have been surprising, given that she had no insurance experience and was relatively young and inexperienced to serve as a director on a multibillion-dollar board.

However, Susan Bayh had one competitive advantage that made her stand out as attractive to Anthem: She was married to Evan Bayh -- former governor of Indiana who, in 1998, was elected to the U.S. Senate.

Susan Bayh's corporate directorships provide a significant chunk of the Bayh family income. In addition to the $2 million she's received from WellPoint since 2003, she has received likely double that from additional corporate boards she has sat on. Last year, for example, she sat on four other boards besides WellPoint's.

She collected $656,062 in cash and stock for all her board work last year, but half ($327,000) came from her WellPoint directorship. Because she first started taking work as a corporate director in 1994 (when she was 34 -- when Sen. Bayh was still Gov. Bayh), she has served on 14 boards.

She's actually cut back on her directorships in recent years. In 2006, she served on six corporate boards and received just under $1 million in total compensation for the year. That year, Evan Bayh received the standard $165,000 annual salary for serving as a senator.

According to reports he filed that year, Susan Bayh's stock holdings were worth between $1.3 million and $2.7 million that year. Their family's total net worth was between $4.3 million and $15.1 million that year, not including a $1 million home in Washington owned in the name of Susan Bayh.

You don't build that kind of nest egg on a government salary. The Bayhs' wealth is completely thanks to Susan Bayh's numerous corporate directorships.

Quick Stock Sales

But make no mistake, these corporate directorships for Bayh are a cash ATM for her family. Remarkably, although Bayh has always been paid for her work on the WellPoint board in a combination of cash and stock, she has immediately sold her stock as soon as she can. She has never held stock in WellPoint for longer than a year.

If you examine the latest proxy filing with the Securities and Exchange Commission, it shows that Bayh owns exactly zero shares in the company (more than a decade after first being appointed to the board). She's the only director who doesn't hold any shares.

What does this say? To me, it clearly shows that she has no long-term interest in seeing WellPoint's stock price increase. She's there to get her cash and stock and cash out as soon as she possibly can. She's doing this for the money, not for the benefits of seeing shareholder value increase.

There is more proof that Susan Bayh seems oblivious to the concept of increasing shareholder value -- the very purpose of a corporate director -- through effective monitoring of the company's management.

Since 1994, she has served as a director for a small Indiana radio company called Emmis Communications (EMMS - commentary - Trade Now). This is a company with a $40 million market capitalization. Bayh currently serves on the compensation committee. For some unfathomable reason, despite Emmis' tiny size, Bayh has agreed that Emmis should have a corporate jet.

The CEO and COO/CFO are able to fly on the jet for personal use -- paid for by Emmis' shareholders -- at a cost of almost $100,000 last year. This is simply a ridiculous waste of money. A company this size should see its execs flying AirTran (AAI - commentary - Trade Now) and Southwest (LUV - commentary - Trade Now), not in a corporate jet.

A tip to Susan Bayh: When your company's stock is down 93% over the last five years and is being warned that it will be delisted by Nasdaq, it shouldn't own a corporate jet.

I don't begrudge the Bayhs making money; this is America. However, I am highly dubious when I read that Evan Bayh has repeatedly said that he is not influenced by the corporate ties of his wife.

In 2007, he told the Fort Wayne Journal Gazette: "I can honestly tell you that if my wife did not have a job, none, I can't think of a single decision I've made that would be any different. I look at what's best for our state and our country and my own conscience. My integrity matters more to me than anything, so I always do what's right for the people who put their trust in me."

He points out that lobbyists for his wife's companies aren't allowed contact with his staff as proof of the ethical wall that exists.

Yet Evan Bayh, Susan Bayh and WellPoint seem to share almost identical views on health care and the current public option debate. Bayh recently refused to commit to voting for cloture on a bill with a public option saying: "It's not fair to ask people to facilitate the enactment of policies with which we ultimately disagree."

Susan Bayh recently argued to Business Week that, "Traditional Medicare pays for quantity rather than quality, and all of the pilot programs that were intended to help government change that ... have failed." She strongly opposes any public option and instead supports reforms that would require everyone to own private insurance plans so that "everyone is in the pool."

WellPoint, the largest health insurer in the country, has 80 million customers who buy private insurance. It would greatly benefit from any government initiative to encourage more people to buy more private insurance. To that end, WellPoint spent $2.6 million in campaign contributions in 2008 for Democrat and Republican candidates. (Evan Bayh himself received more than $500,000 in campaign contributions from the health care industry in 2008.)

(Calls to Evan Bayh's Senate office and WellPoint public relations were not returned by the time this article was published.)

While my personal views on health care favor a market-based rather than a government-based solution, I find the hypocrisy of Evan Bayh highly offensive. You would have to be clueless not to see the conflict of interest of his views on this topic and the personal gain his family stands to reap as a result of his wife's connection to WellPoint, if his stated views -- in the name of his constituents -- are seen through.

Evan Bayh, Susan Bayh and WellPoint all look bad here. Until he recuses himself from votes on health care or she resigns from the WellPoint board, criticism of them on this topic will deservedly continue.

At the time of publication, Jackson had no positions in stocks mentioned in this article. Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Icahn't Should Hang It Up

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 28 Oct 2009 12:37:00 +0000

By Eric Jackson 10/28/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , MOT , CIT , BBI , TELK , GFGFQ , CSCO

NEW YORK (TheStreet) -- After a string of disastrous investments and his departure from Yahoo!'s(YHOO Quote) board last Friday, it's time for Carl Icahn to hang it up running other people's money. Here's why.

Icahn's decision to leave the Yahoo! board comes a year after mounting a costly and distracting proxy contest to get elected. That's his right, of course. After all, investors in his Icahn Partners hedge fund were the ones who footed the bill for his efforts.

Those same investors -- including Icahn himself -- are also sitting on a loss on their Yahoo! investment. We don't know the exact magnitude of the loss but it appears, based on a review of the SEC filings, to be on the order of -23% or roughly $320 million on 60 million shares held at the end of June. Icahn's stated reasons for stepping down from the board were that he no longer had the time and Yahoo! no longer needed an activist.

If he's right, then someone should inform Icahn's buddies John Chapple and Frank Biondi, who came on Yahoo!'s board last year with Icahn. Their whole legitimacy for serving on this board is now in question based on Icahn's comments. They should make like their buddy and head home to Manhattan. And with Yahoo!'s stock at less than $17, far less than Microsoft's(MSFT Quote) offer of last year, it seems incorrect and premature to declare the company a success and not in need of further changes.

Yahoo! investors might correctly wonder: Why the heck did we elect you to represent our interests in the first place, if you're now leaving?

It's true that Icahn's busy tending to other investments in his portfolio with the aim to turn around the performance of Icahn Partners. The fund, which had a three-year positive run starting in 2004, reportedly showed its first loss in the third quarter of 2007, due to poor bets on Florida condo developer WCI and auto parts maker Lear(LEARQ Quote). Since then, WCI and Lear have gone bankrupt, costing Icahn's fund at least a couple of hundred million dollars.

Icahn's hedge fund performance continued to drop in 2008 (down 22% in Q4 alone) and 2009 (down 33% in January). His 60 million Motorola(MOT Quote) shares -- owned since at least December 2007 -- look to be down about $660 million. Motorola's decline came despite Icahn having fought for and winning board seat representation last year.

Icahn Partners was hit by $1 billion in redemption requests at the end of last year and Icahn injected $250 millionof his own money earlier this year. Even today, Icahn Partners' long positions total $2.7 billion through the end of June . That's significantly less than the $4.9 billion in long positions he heldone year earlier .

Icahn's strategy is to take large long concentrated equity positions without using options or pair trading to manage the additional risk, as well as buying up cheap debt. You can ride that train up when markets are good, but get crushed in a down year like last year.

The biggest thing taking up Icahn's time these days is an investment in CIT(CIT Quote). Some are reporting that he will become the biggest shareholder of the company under reorganization. Creditors will decide by Oct. 29 whether to push the company into bankruptcy or accept an offer to refinance its debt. Icahn wants the company to refinance its debt through him, saying the fees he'd collect from the company would be less than the other offer on the table.

Icahn likes buying up debt and bringing companies through the bankruptcy process. He followed a similar path to the one he's on with CIT at XO Holdings(XOHO Quote). In that instance, he effectively gained control of the company as a large debt-to-equity owner.

But he's being sued right now by R2 Investments, an 8.8% holder in XO. R2 contends Icahn turned down at least one buyout bid for the company higher than its then share price in favor of refinancing its debt by purchasing $780 million of preferred stock. In doing so and gaining 80% control of XO, R2 alleges Icahn was able to use the company's losses to offset taxes he would have otherwise had to pay on other businesses he owned. XO, which was trading at $1.27 at the time of the buyout offer that R2 says Icahn turned down, is now trading at $0.77 - a 39% decline.

Besides recent poor investments in Blockbuster(BBI Quote), Telik(TELK Quote), and Guaranty Financial(GFGFQ Quote), his entire Yahoo! foray since last year has been an unqualified failure. It will make future activist campaigns he launches more difficult to execute.

From the moment he launched his proxy fight last year, after Yahoo! turned down Microsoft's $34 a share verbal offer, investors were skeptical of Icahn. They perceived him as a quick flip artist wanting to juice the stock from $23 to over $30, without technology experience to effectively advise the company as a director.

Because he lacked support from institutional investors, Icahn knew his proxy fight might fail to get any of his nominees elected when put to a vote. Therefore, he accepted three seats on the board as a compromise. If you can't win against the wildly unpopular Yahoo! board after making a mess of the Microsoft negotiations last year, what does that say?

Icahn says he helped select Carol Bartz for the top job. Really? Wouldn't Jerry Yang have done it anyway? After all, it was Jerry who offered Terry Semel the top job in 2001. It was Jerry who got to be CEO in 2007, when he told his board he wanted it. And, it was Jerry who knew Carol from Cisco's(CSCO Quote) board and, by Carol's account, offered her the job.

Icahn's friend, Frank Biondi, got to hitch a ride on to Yahoo!'s board on Icahn's coattails. Biondi also joined Yahoo!'s compensation committee and approved Bartz's employment contract. This is the contract that will pay Carol $187 million for four years of work, if she hangs around that long, maxes out her possible annual bonuses, and if Yahoo!'s stock price rises above $25 for 20 consecutive trading days before 2016. That's a good deal for Carol -- not so great for Yahoo! shareholders.

We know that Icahn Partners' investors didn't get a great deal on Carl's involvement with Yahoo! over the last year. However, Icahn, Biondi, and Chapple seem to have done pretty well. According to Yahoo!'s proxy filing, the day these three men were elected to the Yahoo! board, Yahoo! gave each an option to purchase common stock with a grant data fair value of about $250,000 and restricted stock units with a grant date fair value of about $200,000.

This half-a-million-dollar payment went to them personally. Nowhere in the filing does it say that this money went back to Icahn Partners, which funded the expenses related to the proxy contest -- which most estimate cost at least $1 million.

In that same proxy filing, Yahoo! disclosed that, last year, "transactions in the ordinary course of business between the Company and entities for which the following directors served as an executive officer, employee or substantial owner, or an immediate family member of an executive officer of such entity" included "Mr. Icahn". No more information is given, but it would be interesting to know just what transactions were conducted, with whom, for how much, and for what services.

To most outsiders, it appears as though Icahn was summarily ignored by the parties around Yahoo! before and after he was elected to the board. He assumed that he could force a shotgun marriage between Microsoft and Yahoo! He assumed his initial $23-a-share investment could be quickly goosed to $32 or higher. He was wrong.

Steve Ballmer politely listened to him and then apparently stopped taking his calls. Carol Bartz has dissed him from the get-go of her tenure as CEO. She proclaimed to Forbes last year : "Icahn is just another shareholder. What's he going to do, fire me?"

Whether he realizes it or not, this attitude is probably the most damaging thing to Icahn going forward as an activist investor. CEOs and corporate boards will no longer see him as "Carl Icahn: Corporate Raider of the 80s" but "Carl Icahn: Has Been." In their eyes, he'll be Icahn't, not Icahn.

Carl Icahn will always have a reputation as a successful investor. Forbes recently pegged his net worth at $9 billion. Yet, it's unclear whether his hedge fund, Icahn Partners, will continue after his death.

While George Soros, 79, and Julian Robertson, 77, have repeatedly developed talented managers (like Stanley Druckenmiller, Lee Ainslie, and John Griffin) who go on to successful careers, Icahn, 73, has not. If Icahn was hit by the proverbial bus tomorrow, it's unclear that Icahn Partners could or would continue.

Icahn will always be able to grab the headlines with some outrageous comment about a CEO because he's become the "poster boy" for activist investing. He could keep running money and probably will. However, as he takes his leave from Yahoo!, it appears as though his most influential days as an activist investor are behind him and not in front of him.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Frontline's Report on the Battle to Regulate OTC Derivatives in 1998

dr.eric.jackson@gmail.com (Eric Jackson) — Thu, 22 Oct 2009 04:33:00 +0000

Steve Wynn on his purchase of a plane for Garth Brooks

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 21 Oct 2009 20:58:00 +0000

How to Make Transparency Work

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 21 Oct 2009 12:25:00 +0000

By Eric Jackson

10/21/09 - 06:00 AM EDT

Stock quotes in this article: RMG , MCO , MHP

NEW YORK (TheStreet) -- Lawrence Lessig's recent thought-provoking article in the New Republic challenges the assumption that more sunlight is always a better disinfectant for corruption and bad behavior than less.

Although his primary focus is on how more transparency doesn't always lead to better political outcomes, there are obvious implications of his argument to the world of corporate governance and executive compensation.

The critique, entitled "Against Transparency: The perils of openness in government," offers a partial explanation of why, even after Enron and Worldcom when everyone agreed that corporate boards screwed up in overseeing their companies, boards failed again in the recent mortgage bubble. It also suggests what must change now to finally improve corporate governance and executive compensation.

Lessig's argument is that it's become accepted wisdom on both sides of the political aisle in recent years that more transparency is always better. And, in an age of super-computers and ubiquitous access of the Web, it has become easier than ever to make data available.

The assumption many make is that making information available will curb bad behavior before it happens, because the actors will know they are subject to being called out.

Lessig challenges this by using the example of publishing a politician's calendar online. Does this level of information really help the public better judge his or her actions? Does it encourage the politician to behave more justly, knowing others will see his or her breakfast meeting took two hours instead of one last Thursday?

Lessig worries that more information disclosure can have the pernicious unintended consequence of making market actors believe that they don't have to worry about particular problems because they have been disclosed.

Yet, more of a data dump doesn't mean that the data will be processed and acted upon correctly. In fact, more data dumps -- especially in areas like corporate governance that aren't well-understood -- probably make it less likely that bad behavior will be singled out than many would assume.

Lessig is not arguing against transparency in favor of us returning to the crony capitalism world of back-room deals and Russia-style payoffs. He is arguing against a Pollyanna-ish view of the benefits of "naked transparency." Anyone in favor of better corporate governance and aligned executive compensation with performance would be an ostrich not to critically review Lessig's article and think about its implications.

The world of corporate governance is not well-understood by the public or general business journalists. Who but general counsels and governance wonks really understand how corporate by-laws, board selection, and governance-related disclosures in SEC filings work?

There are relatively few people around to actually challenge governance matters in companies -- and a majority of them people are already working as general counsels at companies protecting them from criticism.

In terms of more data not always being better, think of the Securities and Exchange Commission's landmark decision in the early 1990s to require companies to disclose executive compensation. As Lessig points out, instead of resulting in shame keeping a tamper on things, more transparency has inspired jealousy and creativity from compensation consultants and tax attorneys, further accelerating the stratospheric climb of executive compensation.

You can't put toothpaste back in the tube. Transparency and disclosure are here to stay and they certainly do help keep bad behavior in check. But, clearly, some changes need to occur as bad corporate behavior continues apace.

If you think general business journalists will save us, keep waiting. Lessig points out that one of the effects of the decline of mainstream media's traditional revenue sources has been the elimination of investigative reporting.

Less than 10% of large U.S. newspapers employ four or more investigative reporters -- and of those, it's likely scant few of those reporters have any background in corporate governance or executive compensation to be able to take on this topic. Forty percent of large newspapers have no investigative reporters.

If not journalists, who could challenge corporate governance and executive compensation transgressions? Institutional shareholders will only speak to companies privately and on a limited basis. Retail shareholders don't have the time, inclination, or expertise to do this regularly. Research analysts want to curry favor with management. Employees want to keep their jobs.

I actually believe it is the proxy advisory firms (like RiskMetrics(RMG Quote) , Proxy Governance and Glass Lewis) and credit ratings agencies (like Moody's(MCO Quote) and Standard & Poor's, a subsidiary of McGraw Hill(MHP Quote) that are best positioned to play this role. However, to do so effectively, they would have to eliminate conflicts of interest in their own firms.

RiskMetrics, formerly ISS, is the market leader in the proxy advisory space. Many institutional investors use RiskMetrics or other proxy advisory firms as cover for how they vote their proxies. If the pensioners for XYZ pension fund ever raised hell that their fund voted in favor of re-electing a board of directors for a future Enron or Lehman, the fund can blame RiskMetrics for telling them to do so. RiskMetrics happily accepts these fees for being investors' most preferred scapegoat.

The problem here is that RiskMetrics has its fingers in too many pies. They sell consulting services to public companies to tell them how to improve their internal practices (and presumably be viewed in a better light at proxy voting time). They also have started selling corporate governance ratings tools to companies and investors to better understand how to improve their corporate governance practices.

Companies will sometimes tout in press releases how the RiskMetrics Corporate Governance Quotient tool assigned them a 95% rating on corporate governance. They'll later complain if the proxy advisory side of RiskMetrics recommends against some or all of the board at a future meeting.

Others have complained about RiskMetrics' unchallenged clout leads to unfair judgments. One activist investor involved in a battle at a small-cap Canadian company, recounted how he was given 15 minutes to brief a 20-something analyst from RiskMetrics at 4:30 p.m. on a Friday before a long weekend. RiskMetrics came out the next week in favor of the incumbent board, despite many good reasons for withholding votes.

On the other side, one corporate director recently complained to me that Glass Lewis had recently recommended against his re-election based on his age and that he served on too many boards -- even though the majority of his other boards were subsidiaries of his main board. He claimed that they didn't require substantial additional time demands of him. "I was never contacted by them before they made their recommendation and I have no idea who I call to complain now," he said.

The simple solution here for the proxy advisors is to break up the consulting services from the ratings services, so there is no conflict. Ensuring there is sufficient competition will also help them keep their quality up.

The problems of credit ratings agencies' poor ratings and a pay-to-play business model are well-documented. Yet, these groups have the infrastructure, reputations, and could build up the expertise in corporate governance to level judgments against companies. Like proxy advisory firms, market actors would pay attention to their views if they could get their house in order.

Some will advocate for a government agency to bridge the gap here on being a domain expert overseer on topics like corporate governance and executive compensation. However, Ken Feinberg's tenure as pay czar -- however, well-intentioned -- makes me skeptical that such a solution could really be effective in the long-run.

Those of us in favor of better corporate governance and tighter links between executive pay and performance need to see the truth in Lessig's critique of transparency. More data dumps in to the backs of SEC filings won't fix anything. We need domain experts looking at every board, every deal, and every potential transgression, rendering judgments. Fixing the proxy advisory and credit ratings firms is the best way of doing that.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson did not have any positions in the equities mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Talking with @Misstrade about Activist Investing

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 14 Oct 2009 18:09:00 +0000

I recently chatted with Matt Davio (@Misstrade) about activist investing, Microsoft (MSFT) and more. Thanks, Matt, for the opportunity to talk.

Eric Jackson @ericjackson part 1 and MissTrade Talk Activist Investing from miss trade on Vimeo.

Eric Jackson @ericjackson Part 2 Activist Investing from miss trade on Vimeo.

Yahoo!'s Defense of CEO Stock Sales Is Lame

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 14 Oct 2009 12:51:00 +0000

By Eric Jackson 10/14/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , ADSK

NEW YORK (TheStreet) -- Yahoo!'s(YHOO Quote) responses to recent criticism of CEO Carol Bartz's stock sales have completely missed the point and appear designed to obfuscate. If she wants to show real leadership, she needs to stop misleading shareholders.

Let's review the recent controversy. Last month, I noted how Yahoo!(YHOO Quote) officers and directors sold $233 million in company stock but purchased only $103,000 worth of shares over the past two years. This was all spelled out in Securities and Exchange Commission filings.

I created a simple spreadsheet tabulating the sales and purchases and published it online. It quickly drew the attention of the media, which primarily focused on how new CEO Carol Bartz has sold almost $2 million in stock in her first five months on the job.

Since then, Bartz denied that she sold anything -- once on CNBC and once at the New York press event at which she launched Yahoo!'s new $100 million marketing campaign.

These sales were not open-market sales but related to the vesting of restricted stock units (RSUs) Bartz received from Yahoo! in 2009 as part of a $10 million "makeup grant" designed to compensate her for options she left on the table when she left her part-time executive chairman role at Autodesk(ADSK Quote) to take the helm at Yahoo! in January.

Bartz's initial tactical response to the criticism about the stock sales seems to have been: "Damn the filings, I'm going to deny, deny, deny." Perhaps she thought that if she denied it forcefully enough, the issue would just go away.

Yahoo!'s public relations team has taken a more nuanced approach. In response to questions from the Guardian and CNBC about the issue, they explained that the sales were due to taxes Bartz owed on the vested stock. Therefore, they suggested, these weren't "real" stock sales and were no cause for alarm for investors.

These responses fail to address the real issue, though. I've never said these are open-market sales, although they certainly qualify as sales (as the SEC filings show). And I have criticized Bartz for not digging into her own pocket to pay the taxes owed on the vested stock instead of selling parts of those stock grants to do so. Obviously, I can understand why more junior employees choose to sell vested stock to pay their taxes, but senior executives like Bartz have the money to easily cover their tax bills. I'm assuming Bartz thinks her actions as CEO can help Yahoo!'s stock go up in the future. In order to show her confidence in her own leadership -- and in Yahoo! stock -- she should pay the taxes herself and keep all of her vested shares.

Last week, I highlighted in a blog post that Bartz sold another $1.3 million at the end of September, again selling some of those third-quarter vested shares that were part of her "makeup grant" in order to pay her taxes.

Yahoo!'s public relations team objected to this latest post from me, calling my assertions on this and Bartz's other sales "inaccurate and misleading." They pointed out Bartz didn't make an open-market sale. I never said she did. They noted that Bartz's "makeup grant" was previously disclosed. That's what I said in my prior criticisms. They stated that the company "currently" withholds a portion of vested stock in order to pay taxes for "all" employees receiving vested stock because it is "practical" and added that "many companies" do the same. As I've said before, if Carol Bartz wanted to pay her taxes on this vested stock so she could keep all the Yahoo! stock possible, would some human relations bureaucrat at the company have told her no?

As a follow-up, Yahoo!'s public relations team was asked to point to the previously disclosed filing showing that Bartz was required by Yahoo! not to pay taxes herself on the vested stock she received from the company as part of her "makeup grant." In response, Yahoo! pointed to the company's 10-K filing made last February and specifically referred to exhibit 10.17(D) in that filing.

The exhibit lays out the specific terms of the employment agreement that Carol Bartz negotiated with the company relating to stock grants she is to receive. Indeed, the exhibit states that Yahoo! will withhold some of the vested stock to pay Bartz's taxes. However, that same section goes on to say that "[i]n the event the Company cannot (under applicable legal, regulatory, listing or other requirements) satisfy such tax withholding obligation in such method", Yahoo! might have to require Bartz to "pay such amount in cash or check."

There's nothing in this exhibit that says Bartz couldn't pay her own tax bill herself on the grant if she wanted to, in order to keep all her vested stock. Indeed, it's interesting that Exhibit 10.2(F) in the same filing, which refers to situations where all employees (not just Bartz) exercise their stock options and owe taxes, says Yahoo! requires them to pay the tax bill. This can be done by selling a portion of their exercised stock options or paying "cash or check" out of their own pocket. This latter option is exactly what I argued Bartz should have done -- from a leadership perspective -- with respect to her "makeup grant."

My comments about Bartz' stock sales and her egregious pay package, which was approved by Yahoo!'s compensation committee in January, have been neither inaccurate nor misleading. From a shareholder's perspective, Bartz shouldn't have sold these shares in order to pay taxes on them. To demonstrate her belief in the long-term value of the shares, she should have paid the tax bill herself.

The group deserving the most blame in this compensation debate is, of course, Yahoo!'s compensation committee, which signed off on Bartz's employment contract. The committee is chaired by Art Kern and has members Ron Burkle and Frank Biondi, Carl Icahn's right-hand man. They should be ashamed of the following aspects of Bartz's employment agreement:

If Bartz sticks around for four years and maxes out her possible annual bonuses and if Yahoo!'s stock price trades for more than $25 for 20 consecutive trading days before February 2016 -- seven years from now -- she will receive a total compensation package for her four years of work of $187 million. Although Yahoo!'s stock was trading around $12 when she took the job at the start of this year, is it really that much of a "stretch goal" for Bartz to get Yahoo!'s stock above $25 for 20 straight trading days in the next seven years? After all, getting the stock back to $25 would bring it to a level that's still 20% less than what Microsoft(MSFT Quote) offered to pay for the whole company 18 months ago. This would be a lot of money for a relatively low hurdle. I'm all for executives making money for performance, but not easy money.
They gave Bartz a $10 million "makeup grant" in cash and stock for options she left on the table at Autodesk when she signed her Yahoo! employment contract in January. However, according to SEC filings, Bartz's remaining Autodesk options were only worth $3.3 million at that time. Why did Yahoo!'s compensation committee triple the size of the "makeup grant"?
When Bartz is getting a potential $187 million for getting Yahoo!'s stock back to $5 less than Microsoft's buyout offer, isn't Bartz being sufficiently "made up" for the Autodesk options she left behind? Does she need a "makeup grant" on top of all her other compensation? Most reasonable executives would conclude that getting $187 million was better than $3.3 million. This "makeup grant" was padding and should never have been given in the first place.
Why did Yahoo! agree to pay the taxes on Bartz's RSUs related to her "makeup grant" that she receives this year? Bartz would have had to pay her taxes out of pocket on her $3.3 million of remaining Autodesk stock options. Why should Bartz now pay taxes for a $10 million grant out of that grant, and not out of her pocket?
Why did Yahoo! agree to pay Bartz "up to $140,000" for the financial advice she received as part of negotiating her employment contract? This was a great perk for her, but not for Yahoo!s shareholders. Yahoo!s public relations team or Bartz have yet to account for this slap in the face to shareholders.

A majority of Yahoo!'s board deserves to be replaced for so poorly negotiating the potential buyout of the company by Microsoft. All of the members of the compensation committee deserve to be replaced for overpaying Bartz's predecessor, Terry Semel, and for approving Bartz's contract.

But let's be clear: Bartz is no babe in the woods. She's been around the block negotiating employment contracts and knew exactly what she was demanding. Her compensation, perks and tax gross-up demands are excessive. She should immediately pay back Yahoo! shareholders the $140,000 for the high-priced advisers she used to negotiate her employment contract. She should also show her shareholders and employees that her heart is in the right place when it comes to this company's future.

To that end, I call on Bartz to spend $25 million of her own aftertax income on open-market Yahoo! stock purchases. She can keep her $187 million for getting the stock back to a 20% discount to the Microsoft offer, but let's see her put some of her money where her mouth is -- and actually at risk.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund had a long position in MSFT.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

The HP Horse Doesn't Want to Run for this Jockey

dr.eric.jackson@gmail.com (Eric Jackson) — Fri, 09 Oct 2009 03:59:00 +0000

My post a few weeks ago on Mark Hurd's perks at HP has generated a lot of traffic and email comments -- especially from current or former HP/EDS employees.

Here is a link from one ex-EDS'er in Germany upset at the way things have played out.

Of course, every business needs to find a way to cut costs and save -- especially in the current environment -- but there's clearly a large portion of HP employees who feel very upset at the way Hurd and HP management have gone about their cost-savings drive. Preaching cost cuts to the troops, and then turning around and living high off the hog themselves at the expense of shareholders.

I remember one time going to an HP meeting when I worked for a software company while Carly was still CEO. The meeting was at an old DEC facility in Nashua, NH. I remember it took about 10 minutes to walk from the guest entrance desk to the meeting room. Along the way, I passed dozens and dozens of empty cubicles, as jobs had been "rationalized" away elsewhere. When I finally got to the meeting room, the HP folks were all very smart and friendly, but I remember being amazed that we spent a good 15 minutes or so of small talk time discussing what an embarrassment Carly was as a CEO. I remember leaving the meeting thinking: "great people but that company is in trouble if that's how all the employees feel about their boss."

These recent comments I've received back from employees about Hurd remind me of that meeting again.

I'm sure Hurd would say these are disgruntled employees who don't get the need for "cost cutting." They don't understand the new competitive global environment we operate in, etc. etc. He probably would also say all this employee grousing will go away when the stock starts going back up again. In fact, at a recent analysts' day, he touted that HP was going to grow "faster than the market" in 2010.

Maybe. But I don't buy it. I sense deep anger and lack of trust among the rank and file with Hurd and his team. I get a sense of Hurd being the jockey on a horse that's decided it doesn't want to run any more for this jockey. He can whip it all he wants, but that horse is not going to run.

Let's see how HP's stock does next year and if it does grow faster than the market.

Carol Bartz Sold Another $1.3 Million of Yahoo! Stock Last Week

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 07 Oct 2009 17:03:00 +0000

As predicted last month, when I first raised this issue, Yahoo! disclosed late Friday that Carol Bartz had sold another $1.3 million of Yahoo! stock at the end of September. This brings her total Yahoo! share sales for the year to $3.3 million.

When I first brought up this issue of how she and several other Yahoo! insiders had dumped shares over the past 2 years, Bartz went on CNBC and flat-out denied that she'd sold any shares.

She later reaffirmed at the press conference announcing Yahoo!'s new $100 million marketing campaign ("It's about Y!ou") that she'd never sold any shares.

I don't understand why she has decided to take this strident denial approach, when her SEC filings clearly show she disposed of (i.e., sold) her shares.

These sales all have to do with a "Make-Up Grant" Yahoo!'s board gave to Carol as part of her employment agreement she signed with the company. They agreed to give her $10 million worth of cash and Restricted Stock Units (basically Yahoo! shares) in blocks each quarter for her first year (2009) on the job to make her whole for the Autodesk stock she left on the table to take the Yahoo! CEO job.

No one has ever explained why Yahoo!'s board decided to give her a $10 million "make-up grant" when, according to SEC filings, she was only leaving Autodesk stock and stock options worth $3.3 million at the time she signed the deal.

Every quarter, when Carol gets her cash and stock from Yahoo! for this inflated "Make-Up Grant," she owes taxes on it. What is unusual about Carol compared to other senior executives who have been well-compensated through the years is that, rather than pay her tax bill herself, she has decided to dump part of her Yahoo! shares every quarter to pay those bills.

If I was an employee or shareholder, I would be disappointed that Bartz didn't want to keep every single share of Yahoo! stock she possibly could -- because I would think she anticipates that the price is going to go through the roof in the months and years to come.

How do I know Carol has enough cash in the bank to pay these tax bills herself? In 2007 alone, she exercised options at Autodesk worth $47 million. That's just that one year. Of course, she has enough.

It comes down to a question of leadership. When she had the choice to demonstrate her desire to keep all the Yahoo! stock that she negotiated so hard to get, she decided that she would rather keep her existing cash in the bank, than keep a few more hundred thousand shares of Yahoo! And then, to go on about how she never sold stock, and get Yahoo! PR to say this is done all the time -- when it's not, by real leaders -- that's bush league.

Steve Wynn's Big Cashout

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 07 Oct 2009 11:45:00 +0000

By Eric Jackson 10/07/09 - 06:00 AM EDT

Stock quotes in this article: WYNN , MGM , LVS , EBAY

NEW YORK (TheStreet) -- Steve Wynn and his chief operating officer are pushing back from the table.

Since the end of July, Steve Wynn has sold $114 million worth of shares in Wynn(WYNN Quote) and his Chief Operating Officer Marc Schorr has sold over $7 million. It's the first time in the last decade that Wynn has sold such a large chunk of shares. For Schorr, the proceeds from his sale exceeded his average annual total compensation over the past three years.

For these casino operators, their sales might be a canary in the coal mine to other investors to take some profits on the gains in this sector since the March lows. Since March 9, Wynn is up 343%, MGM(MGM Quote) is up 480% and Las Vegas Sands(LVS Quote) is up a whopping 886%.

The valuations are rich, with Wynn sporting an 80 times forward price-to-earnings ratio, with Las Vegas Sands at 60 times. Meanwhile, Wynn carries a debt load of $4 billion and a meager free cash flow of $456 million. Las Vegas Sands is saddled with $11 billion in debt and $242 million in free cash flow. Forward P/E figures weren't available for MGM, but it has $12 billion in debt and $885 million in free cash flow.

Wynn's stock price is virtually unchanged from a year ago. Is the forward-looking prognosis for this sector really the same today as back then? Just a few days ago, MGM's mega-project, City Center, announced that over 160,000 applicants swamped their job fair for 12,000 positions. That suggests to me that -- while Vegas may still remain a playground for celebs and the super-rich -- the regular consumer will find it difficult to splurge for a trip to Sin City for the foreseeable future.

Beyond fundamentals and the macro-environment, there's another reason to be wary of investing in these casino stocks: poor governance. Maybe it's not surprising in a town where the high-rollers get the red carpet treatment, but the ultimate red carpet treatment is saved for the executives who run these casinos. Perks abound, rubber-stamped by crony boards. If shareholders don't like it, buy an electrical utility. This is Vegas, baby!

Casino honchos have received some of the sweetheart deals and perks in past years -- all paid for by shareholders. They include:

Personal use of aircraft. Steve Wynn racked up over $1 million in personal trips last year and both Wynn and Las Vegas Sands lease their aircraft fleet from companies controlled by Wynn and his counter-part Sheldon Adelson.
Leasing Steve Wynn's personal artwork collection and then picking up the tab for the insurance.
Valuing a coffee bar within a hotel as worth $3.1 million and then buying Adelson's 50% stake from it.
Setting up jobs for wives, step-daughters, nieces and nephews with total annual compensation worth as much as $4 million.
Paying $3 million for security costs related to protecting Adelson and his family (although Adelson chipped in $800,000 to the total bill).
Help in buying stock near the all-time lows, such as when Adelson's wife bought preferred stock and warrants last November which has since led to paper gains of over $1 billion. Las Vegas Sands' shareholders paid the $500,000 in legal fees she incurred in making this purchase.
Covering rent and amenities at the Wynn's personal residence for $580,000. Interestingly, a recent third-party analysis of this residence determined that the rent would not be reduced for the coming year, despite "the significant deterioration in the rental market in Las Vegas."
Personal construction of Las Vegas Sands's SVP Robert Goldstein's house in the amount of $364,000.

Of course, Wynn downplayed his mega-stock sale in August. He explained that he needed the additional "liquidity" in preparation for his upcoming divorce from his wife, Elaine. He was also quick to point out that this sale represented only 10% of his entire holdings. Yet, this is the second time that Elaine (who is also a Wynn director) will divorce. No additional liquidity was needed to fund the first divorce.

The fact that the sale also occurred so close to Wynn's COO dumping shares is also noteworthy and, I don't think, a coincidence. When you comb through these SEC filings and you see the kind of perks these executives sock away for themselves at the expense of shareholders, it's clear that an action like a stock sale doesn't happen with a lot of thought and consideration. It will be interesting to see what other execs at Sands and MGM do in the coming weeks. For now, the stocks are all still near 10-month highs.

What's next for these volatile stocks? If eBay(EBAY Quote) is a gauge -- as discussed in my column last week -- Wynn could be headed for trouble. Its CEO is distracted by personal trips on the corporate jet to the tune of $1 million and a messy divorce. Its COO is also now 61 and presumably starting to think about golfing full-time. It's time to start cashing out.

These firms are minding their own interests -- it's time for shareholders to start minding theirs.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund did not have any positions in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

eBay Must Wring Out CEOs' Excess

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 30 Sep 2009 19:47:00 +0000

By Eric Jackson 09/30/09 - 06:00 AM EDT

Stock quotes in this article: EBAY , HPQ , YHOO , MSFT , AAPL , CSCO

NEW YORK (TheStreet) -- I've recently criticized Yahoo!'s (YHOO Quote) Carol Bartz and Hewlett-Packard's (HPQ Quote) Mark Hurd for excessive pay and perks, given their companies' performances.

My focus on Silicon Valley gluttony would be incomplete without discussing the perks at eBay(EBAY Quote).

After founding eBay in September 1995 and overseeing all aspects of the business for the first three years, Pierre Omidyar decided he had a tiger by the tail and needed some professional management. He hired Meg Whitman, a Harvard MBA with stints at Bain, Hasbro(HAS Quote), FTD, Walt Disney(DIS Quote), Procter & Gamble(PG Quote) and Stride Rite, as CEO in March 1998. The company went public six months later and has been a runaway success.

eBay is an incredible entrepreneurial story. Omidyar and his first employee, Jeff Skoll, deserve countless wealth for creating a multibillion dollar company from nothing. Along the way, Skoll -- who no longer holds any eBay stock -- cashed out equity worth $5.3 billion. Omidyar, still chairman, has cashed out about $3.5 billion to date, but his remaining equity stake is worth another $3.8 billion at current market prices. He now lives in Hawaii and is a philanthropist. And with as much wealth as they've created for themselves, Omidyar and Skoll have created more for others and should be celebrated for this success.

Whitman, who stepped down as CEO last year and now has ambitions to become governor in California in 2010, had a net positive record overseeing eBay. She rode a rocket ship of growth -- getting through the early days of frequent Web site crashes -- and ultimately got it to be a $60 billion company in late 2004; it's about half that valuation today.

Yet Whitman's final years at eBay leave her open to criticism. She promoted a drunken-sailor approach to acquisitions, always overpaying and making little effort to stitch them together. A culmination was the $4.1 billion purchase of Skype in 2005 (including all payouts), in which she took an auction and e-commerce site into the phone business.

Potentially more damaging in the long-run for eBay than overpaying was that Whitman didn't get the intellectual property associated with Skype. This has allowed Skype's founders to now come back and sue eBay for trying to unload the property recently at a valuation of $2.75 billion.

Although Whitman hasn't done as well as Omidyar and Skoll, she's been well-compensated for her time as CEO. According to filings with the Securities and Exchange Commission, Whitman was paid $47 million in total compensation between 1998 and 2008. Additionally, she sold eBay stock during that time worth about $732 million. She still owns stock in the company as of the end of last year worth another $500 million at today's valuation, as well as additional stock options that will have renewed value if eBay's stock gets above $31.

I believe Whitman deserves every nickel of compensation and stock sale proceeds she got between her joining the company in 1998 and Jan. 1, 2005. Since then, however, eBay has been in a tailspin with the stock down 59% vs. a Nasdaq decline of 3% over the same period. eBay's new CEO John Donahoe was hand-picked by Whitman because he used to work with her at Bain. He has spent the first two years on the job trying to give the company some sense of focus and direction, which it lacked under his predecessor.

Something happened in Whitman's last four years on the job in which her pay became dramatically disconnected with eBay's stock price and her perks started to go through the roof.

Based on my review of the company's SEC proxy filings, it appears that there were two big clues for investors that suggested, between 2005 and 2008, Whitman's interest had drifted away from increasing the stock price of eBay to increasing her cash compensation and perks. Had anyone seen these clues -- and, interestingly, perhaps Skoll did as he liquidated his entire eBay stake in 2006 -- they might have pulled the ripcord on owning the stock in 2006 or 2007 when it was trading at $35, before the bottom fell out in the stock and it hit its nadir below $10 this past March.

The first big clue that Whitman's eye was no longer on the ball as CEO had to do with her total annual compensation spiking in the last two full years of her tenure, even as eBay's stock price continued to decline. Peaking at $58 at the start of 2005, eBay's stock price dropped 43% over the next three years. Over that same period, Whitman's total annual compensation almost quintupled to $13.9 million from $2.9 million.

Meg Whitman's Total Annual Compensation

	SEC Filings

One of the interesting coincidences, and perhaps not a coincidence at all, about the above figure is that Whitman's annual compensation is remarkably modest from 1998 through 2002. Over that time period, she averaged total annual pay of $412,000. During that time, there were three members of eBay's compensation committee: Philippe Bourguignon, ex-CEO of EuroDisney; Bob Kagle, general partner of Benchmark Capital and early eBay investor; and Howard Schultz, the Starbucks(SBUX Quote) founder who also is a venture partner in Maveron, an early eBay backer.

At the end of 2002, Schultz left eBay's board and compensation committee. He was replaced by Tom Tierney. Tierney was formerly the CEO of Bain Consulting and, indirectly, Whitman's old boss. Tierney would pass any stock exchange definition of an "independent" director. But for those of us who live in the real world, it is obvious that Whitman had a new friend on the small group deciding how she would be paid.

It should come as no surprise then that this committee immediately started loosening the purse strings, and for the years 2003 to 2007, just before she resigned, Whitman's total annual compensation averaged $7.6 million.

The second big clue that Whitman was no longer as focused on eBay's fortunes in her final four years as CEO was the amount of time she spent flying around the world on personal business in eBay's corporate jet, which was paid for by eBay shareholders.

As the chart below illustrates, eBay's compensation committee (again perhaps indirectly linked to Tierney's arrival) went from a practice of not granting Whitman any personal air travel on the corporate jet paid by the shareholders to almost $1 million a year in her final two full years on the job.

That $1 million includes tax gross-ups, meaning shareholders also paid Whitman's taxes on the benefit she received of making all those flights instead of the billionaire paying her taxes herself. These two years of lavish perks coincided with a time when eBay's stock dropped 22%, even though Nasdaq was up 17% in the same period.

Meg Whitman's Personal Aircraft Costs Paid by EBAY Shareholders

	SEC filings

I took H-P's Hurd to task last week for spending almost $150,000 last year on personal air travel in H-P's jet and charging it to his shareholders.

So, I'm just flabbergasted seeing that Whitman spent more than $1 million on personal air travel in 2006. How do you do that? And how does Whitman and eBay's compensation committee justify trying to brazenly sneak that large expense report past shareholders, especially when the stock is tanking during the ginned-up, credit-fueled boom of 2006?

I don't follow California politics -- although I'm a fervent supporter of free market capitalism as advocated by Milton Friedman -- but I find it highly ironic and disingenuous of Whitman to portray herself now as a populist based on her time at eBay. According to a glowing Fortune profile of her political ambitions last March, the only "dirt" her critics have been able to dig up on her is that she voted in only half the elections for which she was eligible in the last decade. She explained it this way: "I was head down, building eBay, with two teenage sons and a neurosurgeon husband, and traveling half the time."

She was certainly traveling half the time -- for personal vacation jaunts, all paid by eBay shareholders.

In the last two years, perhaps self-conscious at just how embarrassing these numbers were, eBay decided to break up the personal air travel perks into two categories: purely personal travel and travel to outside board meetings. Whitman was on the boards of Procter & Gamble and DreamWorks Animation (DWA Quote) in the last two years of her tenure. So some of her million-dollar expense went to shuttling her to L.A. and Cincinnati several times a year for these meetings.

I can understand why eBay burnished Whitman's personal network to serve on those boards and rub shoulders with Steven Spielberg and other luminaries, but how did serving on those boards help eBay shareholders? They say that While Rome burned, Nero fiddled. At eBay in 2006, while the stock dropped and the Skype merger was a mess, Whitman flew to Hawaii and other locales on a private jet paid for from the shareholders' bank account.

So, a question to the eBay compensation committee: Who do you think you are? With the exception of H-P, no other tech company foists off this extravagant perk on its shareholders. Microsoft(MSFT Quote), Cisco(CSCO Quote), Intel(INTC Quote) and Apple(AAPL Quote) don't do it. Even Yahoo! -- the king of excessive compensation -- doesn't do this. What makes eBay so special?

Most troubling about this "CEO entitlement mentality" that Whitman adopted in her final years on the job is that she's passed the habit on to her successor. Donahoe racked up almost $280,000 worth of personal aircraft expenses in his first nine months on the job in 2008. I can't wait to see what he can do this year with a full 12 months.

I doubt he's ever had to answer to why he's indulging himself in this ridiculous expense. If asked, I suspect he'd look blankly ahead and say something like, "Well, Meg said it was OK."

It's time for eBay to grow up and stamp out these excesses. Just because you've always done something dumb doesn't mean you should keep doing it. Make your well-compensated execs pay their own way on personal trips using the corporate jet, and start linking pay for performance. Donahoe made $13.1 million last year for his nine months as CEO, while eBay's stock dropped 55%, far wider than Nasdaq's 30% loss in that same period.

eBay's board, particularly its compensation committee, needs to turn the page on the Meg Whitman era and get its executives focused on the tough task at hand in turning around the company instead of worrying about their next tee time.

-- Written by Eric Jackson in Naples, Fla.

t the time of publication, Jackson had no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Maggie Wilderotter Quits Yahoo! Board

dr.eric.jackson@gmail.com (Eric Jackson) — Tue, 29 Sep 2009 11:38:00 +0000

Maggie Wilderotter -- the most recent addition to Yahoo!'s board, joining in July 2007 (not including Carl Icahn and his band of merry men who joined last September) -- is now its most recent departing director. She gave the company notice last week that she plans to step down at the end of the year.

The fact that she's leaving is "not due to any disagreement with the Company on any matter related to the Company’s operations, policies or practices."

When asked if she quit because of new CEO Carol Bartz, Wilderotter added in an email exchange with the FT that "I think Carol is terrific." The lady doth protest too much.

Of course, it is true that Wilderotter has trouble on the homefront with the company she's actually still the CEO for: Frontier Communications (FRT). She has only been able to squeeze in a few hours for that job over the past few years, while she's been serving as a director for Yahoo (YHOO), Xerox (XRX), and Proctor & Gamble (PG) -- whose board she joined this year to take Meg Whitman's slot who is now seeking to become California's next Governor.

Wilderotter's directorships pay well. In addition to the $5.5 million she made last year in her real job as CEO, she made $400,000 as a Yahoo! director, $132,000 as a Xerox director and she'll likely get $250,000 this year as a P&G director -- what the average director last year made there. Why give up the money?

I generally don't like former CEOs sitting on boards, as they help perpetuate the "I'll-scratch-your-back-you-scratch-mine" attitude that dominates most boards when it comes to compensation and really challenging the CEO. If you've been a CEO yourself, you would feel sympathy for the current CEO on whose board you sat. You wouldn't want to show him or her up.

But if former CEOs are bad directors, current CEOs are worse. From a shareholder's perspective, they have a job to do and they should be eating, sleeping, and drinking that job -- not flitting off to board meetings across the country. CEOs take on these directorships to network and further their own careers -- not bring back insights from another company to their home company.

Wilderotter is a good example. She joined Xerox's board in 2006. There, she met Robert McDonald, then COO of P&G. They hit it off. When Meg Whitman stepped down from the P&G board and AG Lafley decided it was time to hand the keys of P&G to McDonald, he called his old buddy from the Xerox board, Maggie Wilderotter.

Yet, all this learning, monitoring, and advising that Wilderotter has done as a director in these past few years has not translated well to performance at Frontier Communications -- or for the companies on whose boards she sits. Since she joined Yahoo!'s board in July 2007, Frontier's stock is down 52%, Yahoo!'s is down 36%, and Xerox's is down 60%. The NASDAQ over this time is down 20% (and Frontier's direct competitors have outperformed Frontier's stock by about 20% over this time). (Yet, Wilderotter's total compensation is up about 150% in the last two years.)

So there is an argument to make that she needs to make time for turning around Frontier. Yahoo! would have to feel a little hurt though that Wilderotter seems to see Xerox as having a brighter future than the Web portal (as she's staying on the Xerox board).

However, I think there's more going on here. When you join a big-time board like Yahoo!'s, you don't grab your ball and go home after 2 years. You look like a quitter. Heck, becoming a Yahoo! director is like getting tenure as a Professor -- except it pays much much better. You can settle in for as long as you like at Yahoo! -- just ask Art Kern and Eric Hippeau who are about to embark on their 15th year as a director there.

I think it's obvious that Bartz and Wilderotter didn't see eye to eye on something. This is Carol's board now -- and, if you're not on her team, you're off (as would be the case on virtually every other board in America today).

Wilderotter has no business being on any outside boards when her own company's stock is going down the tubes. However, compared to others on Yahoo!'s board, she looked like one of the stronger directors. I specifically recall Chairman Roy Bostock going out of his way at the 2008 shareholders' meeting extolling Wilderotter's virtues as a director.

As bad as Wilderotter was as a Yahoo! director, the remaining directors are worse.

How to End Decoupled Executive Pay-for-Performance & Extravagent Perks

dr.eric.jackson@gmail.com (Eric Jackson) — Sat, 26 Sep 2009 15:57:00 +0000

Over the past 2 weeks, I’ve criticized Yahoo!’s Carol Bartz and HP’s Mark Hurd for excessive pay and perks, given their companies’ recent performance. It’s been interesting to read the many emails I’ve received on the articles – mostly from employees of both companies.

A few emails – maybe 5% -- take the CEO’s side and make the case that paying our leaders a lot of money is part of our capitalist system. Their advice to me: get over it already.

However, the majority think it’s crazy that these leaders (more so Hurd because Bartz has only been there since February) have pushed through job cuts and slashed pay for workers and then pay themselves and their lieutenants gobs of money.

One reader who asked “why do people equate corporatism to capitalism?... Corporatism (what people ignorantly call capitalism today) transfers ownership of assets from the individual to the corporation. In pure capitalism, ownership of assets is predominantly held, and kept by, the individual.”

One reader asked me, expressing shock and outrage at how HP’s execs could be flying around on private jets for personal trips on the shareholders’ dime when she knew several former employees now in food lines, “how can this happen that these executives get away with this?” There are many to blame here.

Not many journalists or retail shareholders go through a company’s proxy statement in detail, reading footnotes on each page outlining executive comp. When mainstream reporters cover an executive’s new pay package (like Bartz’ back in January), they typically vastly understate it. Why? Quite simply, it takes a long time to read through and digest all the variables to tabulate a true likely scenario of what someone’s going to be paid over the next year or few years. Most journalists want to pump out a story and move on to the next one – or frankly aren’t trained in how to read all the permutations of a comp table.

If journalists aren’t able to read through these comp tables, is it any wonder that most retail shareholders can’t or don’t?

And, although the SEC has tweaked the requirements for how companies need to report this information, you can’t say the agency has nailed it yet, if the goal was for shareholders to be able to understand the information and act on it when necessary.

There is one group smart enough to know what’s going on in the comp tables, and is in a position to call out CEOs for egregious pay: the analysts who cover the companies. Yet, they won’t, because it doesn’t do them or their employers any good. Even post-Henry Blodget, analysts don’t get bonused for antagonizing CEOs with comfy pay packages. So, they keep their heads down, pump out meaningless price targets, and ask innocuous questions of management during their quarterly calls like “I wanted to get a little more color on your day sales outstanding,,,” or “what assumptions should we make about your tax rate for next year” and – my personal favorite – the obsequious pat-on-the-back “great job, guys.”

The few activist investors left are only going to poke the few companies that they take positions in. They’re not going to call out large numbers of CEOs – especially if they don’t have skin-in-the-game.

Larger institutional shareholders like Barclays Global or Legg Mason or some of the larger pension funds could take this issue on – and sometimes will raise their voice. However, these investors typically have hundreds of holdings. Is it worth their time and effort to stop and publicly criticize Mark Hurd or Carol Bartz? They also tend to shy away from having their comments in the press. So they’ll discuss their views during private chats instead – unfortunately keeping the CEOs self-serving practices from the light of public scrutiny.

Who’s left? Employees, who definitely have a vested interest in seeing a company’s shares increase and calling out internal practices that are hurting a company’s long-term prospects. But these people will not speak up publicly – understandably so – for fear of their jobs.

Then there are labor groups like the AFL-CIO and AFSCME – or Michael Moore for that matter -- who bring up excessive executive pay. Entrenched and overpaid CEOs and their aiders and abeters have been successful in portraying these groups as extremist and thus marginalizing them.

So, how will this problem of enormous executive pay that’s delinked to performance change? After all, we’ve been talking about this problem since at least the early 1980s and it’s never, ever changed. In fact, it’s only become more delinked.

As someone who strongly supports a free market capitalist system – not crony capitalism or ‘corporatism’ as the reader called it – I think it’s the responsibility of shareholders to speak up and put a stop to this. The SEC can help by changing regulations to make it easier -- and closer to a free market ideal -- for shareholders to remove entrenched directors who are not representing their interests in overseeing CEOs and management (such as the proxy access initiative being considered at the moment, which is an improvement over the status quo, but certainly could go further). Yet, it must start at the individual level, with each shareholder -- large or small – speaking up and making their voices heard.

Shareholders who assume they can free-ride off of what Gordy Crawford of Capital Research does (or Carl Icahn or Eric Jackson or whomever) will be playing right into the hands of Hurd, Bartz, and other CEOs who want us all to look away from all the pay and perks they’re getting – whether or not they perform.

I don’t expect employees to be martyrs and sacrifice the financial futures of their families by speaking out. But, with the Web, it’s become easier than ever for people to anonymously – yet with credibility and impact – share their views on a particular topic.

Shareholders also need to learn that, when you gripe about some fat-cat CEO on a Yahoo! Finance message board or a disgruntled employee blog, nothing changes. You have spoken as 1 voice only, and it’s been lost as soon as the words have left your lips. However, when you pool your voices together and speak as a group, it becomes impossible to ignore.

I hope that HP and Yahoo! shareholders (whether employees, retail shareholder or large shareholders), as well as other shareholders being extorted by crony capitalist boards and CEOs, start to channel their voices and put sufficient pressure on them to change their ways. Decoupled pay-for-performance (and extravagant perks) won’t change until shareholders rise up and say “we’re mad as hell about this and not going to take it anymore.”

[Jackson’s fund owns no shares in the companies mentioned in this article at the time of publication.]

US News: Why CEOs Survive Recession Better Than Others

dr.eric.jackson@gmail.com (Eric Jackson) — Thu, 24 Sep 2009 18:48:00 +0000

By Rick Newman

Posted: September 24, 2009

It's good to be CEO, even in a recession. Especially in a recession.

Hewlett-Packard's stock price

fell 29 percent in 2008, and the company announced plans to lay off 25,000 workers after it acquired Electronic Data Systems. But CEO Mark Hurd didn't feel the pain. Hurd earned $43 million in 2008, a 73 percent raise from his 2007 pay. Perks included $136,000 worth of personal travel on corporate jets, paid for by shareholders, and $7,472 in travel expenses for Hurd's family, according to an analysis of HP's annual proxy filings by shareholder activist Eric Jackson. Several other top HP executives earning multimillion-dollar pay got double- or triple-digit raises.

[See 10 gaffes by doomed CEOs.]

Hurd has been a strong CEO since he took over in 2005, generally credited with enhancing HP's profitability after a period of drift. But the big pay hikes during a dismal year are generating some of the toughest criticism of Hurd's tenure. "There are some very troubling aspects about how he, his management team and his board approach executive compensation and governance," writes Jackson. "Investors

should steer clear of this Silicon Valley icon until it gets its act together."

For all the talk of reining in CEO pay and enacting financial reform—even from some CEOs themselves—it's beginning to appear that very little has changed in the way companies are run and executives get paid. A new survey of CEO pay by research firm the Corporate Library finds that median take-home pay among more than 2,000 CEOs fell by 6.4 percent from 2007 to 2008, the first time on record that CEO pay has gone down instead of up. But that was in a year in which the stock market fell by 37 percent and the economy lost 2.6 million jobs. By almost every measure, the vast majority of companies performed far worse in 2008 than in 2007. "While the downturn has affected pay, the link between pay and performance remains weak," says the report. "Such a minimal decline in pay given the massive decline in shareholder value is hardly an adequate response."

A surprising number of CEOs didn't personally experience the downturn at all. Of 100 industries tracked by the Corporate Library, median CEO pay went up in 40. The 10 highest-paid CEOs included seven from the oil industry, which had a banner year as gasoline prices hit $4 per gallon. The others were Stephen Schwarzman of the Blackstone Group, Larry Ellison of Oracle, and Michael Jeffries of Abercrombie & Fitch. Schwarzman earned the most: $702 million. No. 10 Jeffries earned $72 million.

[See how to pay CEOs what they're worth.]

Reformers want to see much tougher rules linking executive pay to the long-term performance of their companies, and a few CEOs took a step in this direction. Lloyd Blankfein of Goldman Sachs endured a 97 percent pay cut in 2008, because the tony Wall Street firm rescinded bonuses for top executives. Jamie Dimon of JPMorgan Chase went without a bonus as well, resulting in a 92 percent pay cut. But both of those companies were big bailout recipients under the microscope of politicians and regulators. And both have paid back all their bailout money, which means Blankfein and Dimon will probably do a bit better in 2009.

[Get ready for the miraculous hollow economy!]

It's likely that overall CEO pay will bounce right back up in 2009 as well. Many CEOs earn a relatively low base salary, with the majority of their total compensation coming from bonuses, company stock, or options to buy stock. The plunge in the stock market last year means the value of CEO-owned stock fell as well, and many CEOs declined to exercise options to sell stock since prices were so low. That has changed in 2009, with the market up smartly. It could even turn out to be a record year for CEO pay raises, as they springboard off of last year's lows. At least somebody's getting ahead.

Carol Bartz is "an Old Broad" and "can take criticism" about her Share Dumps

dr.eric.jackson@gmail.com (Eric Jackson) — Wed, 23 Sep 2009 16:00:00 +0000

Shibani Joshi of Fox Business with 2 stories on Carol Bartz and her recent stock sales.

My favorite line from Carol's press conference yesterday, at which she was asked about criticisms about her dumping shares: "I'm an old broad. I can take it."