What is necessary to change a person is to change his awareness of himself. – – Abraham Maslow

Dear fellow business owners

Executive Compensation is a hot topic these days and rightly so! There seems to be almost unanimous agreement that it got out of line in the “bubble” times, unless you are one of those that are able to somehow justify that earning $100 million bonuses is defendable? Those bubbly days are gone, but how do you “reset” these expectations of executives? How do you overcome the “anchoring bias” of people to recent levels? Charlie Rose had a very interesting interview with Paul Volcker here Sept 29, http://www.charlierose.com/view/interview/10631 , in which he makes some very sensible comments regarding executive compensation around the 45 min mark.

I am a firm believer of “everything is relative”. There is many evidence and studies done show people value and compare themselves relative to what their peers have or earn. Leaving aside the argument of whether this is the correct way of valuing one’s self worth, it seems to be the judgment in the business world at least. As a simple example, a top banking executive earning $10 million, but earning 10% more than his closest peer with $9 million, would be just as satisfied as if he was earning $100 million vs his peer’s $90 million. So instead of focusing on absolute values of compensation, i.e. $5 million or whatever, the focus should return to relative values and what appropriate compensation at certain levels of executive management are. I would want to see more intelligent debate in the media and public about what “appropriate” is and how to define and measure the definitions and/or requirements of these different levels. Compensation committees can then go and set relative packages around these levels combined with the correct structuring of long term goal achievement instead of rewarding short term speculative behavior with no real long term commitment from management with their own money. But the debate needs to be public, or it run the risk of staying a closed club of boards, executive CEO’s and compensation consultants in which “ you keep on raising me and I keep on raising you!” stays the motto.

But this is my own “utopia” thinking again. What do you think?

Dear fellow business owners

I am sure you are all as concerned about the trends of executive pay the past few years  as I am.  As shareholders, and the true owners of these businesses, it is our duty to speak up and demand from the directors and boards to structure these compensation structures properly.  The media has a very important responsibility in this regard as well.  I have addressed this issue previously here, http://sastocks.wordpress.com/2009/05/03/aligning-management-with-owner-interests/ , and quotes Warren Buffet again,

“CEOs appoint the comp committee – they don’t look for Dobermans, they look for Cocker Spaniels. In my experience boards have done very little in the way of really thinking through as a owner about “what is the proper way to pay these people and incentivize them not to do the wrong thing?”

Please see below for a very good article in this regard that appeared in the New York Times yesterday.

Best regards

Albie

http://dealbook.blogs.nytimes.com/2009/09/17/blackstone-co-founder-criticizes-bonus-system/

Blackstone Co-Founder Criticizes Bonus System

September 17, 2009, 2:00 pm

The economy may be stabilizing and stocks may be rising, but Peter G. Peterson, the billionaire co-founder of the private equity giant Blackstone Group, isn’t sounding so upbeat.

At a gathering of Wall Street executives on Thursday morning in New York, he expressed deep concerns about the economic security of the United States, and said that the way Wall Street compensates its employees was one of the biggest problems facing the country.

Speaking at a breakfast event held by the Argyle Executive Forum, Mr. Peterson, who was Commerce Secretary under President Richard Nixon, told attendees that long-term, structural challenges related to entitlement spending, deficit spending and health care costs were bankrupting the United States. And he argued that short-term solutions wouldn’t fix the problem.

“Americans have been misinformed and, yes, disinformed, sometimes quite intentionally, by politicians who believe that the American people can’t take the plain, hard truth,” Mr. Peterson said, referring to the $56 trillion in unfunded mandates he says the United States government has on its books. “We have had a lot of experience in bailing out various companies and institutions. We must confront the question: Who is going to bail out America?”

Mr. Peterson addressed another subject that is generating a lot of debate in the United States and Europe: bonuses in the finance industry.

He says that the way Wall Street pays its top employees, reserving large sums for year-end bonuses, is an example of the systemic problems facing the country. He says that the current system rewards short-term gains and doesn’t serve the long-term interests of financial firms’ shareholders.

Speaking to DealBook on the sidelines of the event, Mr. Peterson described how he would set up a better compensation structure: “I would say, ‘you’ve got to put in your own money, the money needs to be paid out based on long-term performance, you’ve got to set aside some of your winnings, have a clawback.” This way, he said, “the public can see their interest and management’s interest as coherent and unified.”

Mr. Peterson made $1.8 billion when Blackstone went public in 2007. In 2008, as he retired from the firm, he announced the formation of the Peter G. Peterson Foundation, which will devote $1 billion of his wealth to educate the public and politicians about the long-term problems facing the country.

Mr. Peterson said Thursday he believed it would take a strong president leading a bipartisan effort with formidable public support to fix these long-term problems,

“I say to all of us, let us get off our respective butts and make it safe for our politicians to make the tough choices, to do the right things not simply for our kids and grandkids but for this remarkable country’s future,” Mr. Peterson said in his speech. “And let us make it unsafe for out politicians to continue to do nothing, continue to deny the undeniable and to continue to pretend that we can sustain the unsustainable.”

– Cyrus Sanati

Dear fellow investors

I believe successful investing is a constant battle against oneself.  A well known Trading Coach and Psycologist always reminds me that we invest or trade our beliefs about the market, and not the market itself.  Acknowledging this  would then force us to continuously examine what our beliefs are, on what facts or evidence these beliefs are founded and if new information have become available to change these foundations of our beliefs.  This is a difficult process and the human ego can be a big hindrance to optimum performance.

I include the thoughts of Benjamin Franklin on the virtue of humility, as I believe it of use not only in our investing careers, but also a very good lesson in our approach to everyday life as well.  It is an extract from an online version of his Autobiography.  I discovered  this book after I read “Poor Charlie’s Almanack” wherein Charlie Munger highly recommended it.  It was a fascinating read and a lesson in life in general for me.

Best regards

Albie

The Autobiography of Benjamin Franklin

Chapter Eight

“My list of virtues contain’d at first but twelve; but a Quaker friend having kindly informed me that I was generally thought proud; that my pride show’d itself frequently in conversation; that I was not content with being in the right when discussing any point, but was overbearing, and rather insolent, of which he convinc’d me by mentioning several instances; I determined endeavouring to cure myself, if I could, of this vice or folly among the rest, and I added Humility to my list) giving an extensive meaning to the word.

I cannot boast of much success in acquiring the reality of this virtue, but I had a good deal with regard to the appearance of it. I made it a rule to forbear all direct contradiction to the sentiments of others, and all positive assertion of my own. I even forbid myself, agreeably to the old laws of our Junto, the use of every word or expression in the language that imported a fix’d opinion, such as certainly, undoubtedly, etc., and I adopted, instead of them, I conceive, I apprehend, or I imagine a thing to be so or so; or it so appears to me at present. When another asserted something that I thought an error, I deny’d myself the pleasure of contradicting him abruptly, and of showing immediately some absurdity in his proposition; and in answering I began by observing that in certain cases or circumstances his opinion would be right, but in the present case there appear’d or seem’d to me some difference, etc. I soon found the advantage of this change in my manner; the conversations I engag’d in went on more pleasantly. The modest way in which I propos’d my opinions procur’d them a readier reception and less contradiction; I had less mortification when I was found to be in the wrong, and I more easily prevail’d with others to give up their mistakes and join with me when I happened to be in the right.

And this mode, which I at first put on with some violence to natural inclination, became at length so easy, and so habitual to me, that perhaps for these fifty years past no one has ever heard a dogmatical expression escape me. And to this habit (after my character of integrity) I think it principally owing that I had early so much weight with my fellow-citizens when I proposed new institutions, or alterations in the old, and so much influence in public councils when I became a member; for I was but a bad speaker, never eloquent, subject to much hesitation in my choice of words, hardly correct in language, and yet I generally carried my points

In reality, there is, perhaps, no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself; you will see it, perhaps, often in this history; for, even if I could conceive that I had compleatly overcome it, I should probably be proud of my humility. “

[Thus far written at Passy, 1741.]

Dear fellow investors

I include a link to a speech made recently by David Einhorn at a conference of which the proceeds go to welfare organizations.  For those of you who don’t know who David is, I suggest you do your homework if you wish, but I hold him in the highest regard.  He is an extremely smart person, softly  spoken and counts his words carefully.  He also has written a book (proceeds for charity) which I have ordered and read last year,  which I can highly recommend.

“Fooling some of the People All of the Time”. http://www.foolingsomepeople.com/main/

Best regards

Albie

Dear fellow Business Owners

I attach with this e-mail a link to an article recently written by John Bogle,  of which a op-ed essay also appeared in the The Wall Street Journal a few weeks ago.   It is,  in one word, excellent, and a definite must read.

The Culture That Gave Rise To The Current Financial Crisis

http://johncbogle.com/wordpress/wp-content/uploads/2009/05/ncctempleton.pdf

Why do I send these e-mails?  Why do I take the trouble to send this to people I don’t even know personally.  Maybe because I am also “old fashioned” in the values I believe in.  Maybe because I believe in the principle of “a good” society.  The small number of people on this list  are people who I believe have ethical values and is not scared to stand up and be heard in public.  We need more of this in  modern society.  We need to change the belief of managements that they can do what they want without the consent or knowledge of shareholders,  who are after all,   the ultimate risk takers and true owners.

Culture will only change if  society looks down on bad  behavior.  Name it and shame it,  will always be effective, far better than more regulation,  but then society as a whole must unite against such bad behavior.  There needs to be more people who stand up at annual general meetings and challenge the decisions of management if the board does not do its job properly.  The journalists and media then must not write articles to ridicule the actions of such activists, but support it, and then maybe, just maybe, we can start changing the culture, because managements and boards will only change if they think and see that society demands it.

But maybe I live in a dream world.

Dear fellow business owners

I am busy reading the newest edition of “Security Analysis”, a book I am sure are well known to all of you as people who share my beliefs about investing in common stocks.

I don’t know if any of you have read the latest edition, but if not,  please take the time to read the “Introduction to Part V, the Quest for Rational Investing”  written by Glenn H. Greenberg of Chieftain Capital Management.  I think it is a brilliantly written piece which I think (hope) all of you would enjoy too.  The online copy can be read here, from page 395.

http://books.google.co.za/books?id=-SVwCBG5ZiwC&pg=PA397&lpg=PA397&dq=chieftain+capital&source=bl&ots=Y_D5_5Roo3&sig=Xy18Cx4Vyxeeo0kpZzG8gEW1O2Y&hl=en&ei=PzoFSsGsLtCZjAfPvfHYBA&sa=X&oi=book_result&ct=result&resnum=3#PPA395,M1