The Directors Letter: Sample

In This Issue                                       January 25, 2012  

Crisis Management: Good and Bad

Costa Concordia, Carnival and Crisis Mgt.   First, let us state that the loss of life is a true tragedy and regretfully could have been avoided. That said, looking at this from a corporate business standpoint, this is a management disaster.

The media and the public are managing the story while Carnival, the parent company is silent on the sidelines for some reason. The ship’s captain is under house arrest. Pictures and videos of the ship are easy to acquire due to its proximity to land and they are repeatedly displayed by media outlets around the world. We have interviews with passengers and quotations from the Coast Guard but few, if any, from the corporate owners. Meanwhile, Carnival shares were down 14% just days after the incident.

Ed Note:  Having spent several years in the Navy, I can only follow this story in disbelief. To senior management and the Board, where is the crisis management team, who is the designated spokesperson, what is the company message and where’s the public apology and expressions of sympathy? Why aren’t you in front of the story and why have you allowed the media to take the lead? The ostrich ploy is not a winning strategy and the clock is ticking.

Fixing the Volt   Better mileage and new technology industry is the wave of the future for the automotive and General Motors has a heavy bet on its battery-powered Chevrolet Volt.  In 2011, crash tests revealed possible fires in the battery pack. GM knows of no fires in real-world situations.  

Ed Note:  Worthy of note is the manner in which General Motors has handled the situation, especially when compared with Toyota’s problems of the past few years. They have remained in front of the story, clearly defining and admitting there was a problem. In our opinion, they have done an outstanding job of informing the public of their options (loaner cars or complete replacements). Also, they have been extremely transparent describing the action they were undertaking in straightforward and comprehensive terms.

On January 20^th, General Motors announced that the National Highway Transportation Administration’s decision to close the investigation is consistent with the results of GM’s internal testing. This is an example of good crisis management, before it becomes a crisis. 

 OUR SPONSORS

Changes at BlackBerry, Worthy of Note   For any director, following this story is well worthwhile. For years, the parent company Research in Motion (RIM) controlled the smartphone market because of its secure network and corporate acceptance. Since 1992, the company has had two co-CEOs, one of whom was the founder. In 2007, along came the iPhone and made everything else look and perform like a four-cylinder compact car. In 2010, this was followed by the equally-dynamic iPad.   

In 2011, RIM scrambled to catch up by introducing a tablet computer called Playbook in April and a new BlackBerry in August. Early October saw a three-day RIM network shut down impacting millions of BlackBerrys. This threatened their reputation as a secure corporate device. In December, the firm took a $500 million write-down on unsold Playbooks and declining BlackBerry sales. Over the same period, the stock lost 75% of its value and their smartphone market share dropped below 10%. This week, the Board announced that both CEOs were stepping down. The founder would remain Vice-Chair and the other as a board member. Each owns approximately 5% of the company. A new CEO was announced, who had been with the company since 2007.   

Ed Note:  Some thoughts: Did the management structure encourage a lack of leadership and confuse accountability to the Board? Was the company too complacent with its market position and did they under estimate the competition and the speed of technology innovation? Was the Board too passive and unable to effectively challenge two CEOs? Will their presence on the Board stifle aggressive and rapid change? Time will tell, and quickly, in this unforgiving market.

Online Privacy Bills: SOPA & PIPA   Let’s keep it simple. The letters represent the House and Senate versions of the legislation. The goal is to stop foreign-based websites that sell pirated movies, music and other products. Currently, law enforcement has the right to take action against US-based websites that offer pirated content. The new legislation would stop US companies from providing funding, advertising and links to foreign sites involved in pirating.

The content and media companies support it because it is their asset that is being stolen. Those involved with browsers and search engines (Google) and many websites (Facebook, Wikipedia) say the bill is way too broad in its granting of authority and threatens free speech. There is also a cyber-security component that, frankly, is technically beyond us.

Ed Note:  If your company owns content or is dependent on these pipelines and related sites, this is legislation you must follow closely. Keep in mind, that it is far easier to fine tune legislation before its passage then after.

 OUR SPONSORS 

Arbitration, Says Who?   Certainly not Venezuela’s Hugo Chavez. He stated that he will probably pull out of the World Bank arbitration body, The International Center for Settlements of Investment Disputes. At a minimum, Chavez stated he will not recognize or abide by their decisions. This must be somewhat disconcerting to ExxonMobil, who recently received a favorable settlement from the International Chamber of Commerce for $900 million when Chavez nationalized one of their projects. 

Ed Note:  Remember that old saying, “Fool me once, shame on you, fool me twice, shame on me.”

Private Equity: Good News, Bad News   Our subscribers are directors first, perhaps investors second. Therefore, some update on private equity might be in order if you are considering a liquidity event, whereby you might sell completely to a private equity firm or bring them in as a substantial investor.

First, private equity firms are putting more equity into deals and are piling on less debt because it is not as available as it was several years ago. For the company, this is a good thing. According to Cambridge Associates, in 2011, the private equity firms are paying higher acquisition prices, specifically 9x EBITDA, up from 7x EBITDA several years ago and near the record of 9.7x in 2007. The target companies now appear to be smaller high-growth firms.

The Carlyle Group stated it has been more difficult to get deals done but last year, they managed to sell 43 companies and take 10 public. Not a bad record.

Ed Note:  If you are a director of a smaller high-growth firm with a good story to tell, there will certainly be adequate buyout money available and the prices appear to be on the attractive side. Looking for a significant investor in your firm may be more challenging, but you may be able to negotiate less debt on your balance sheet.

Debt: Sell New, Retire Old   In terms of reference, Finance Committees should note that several large financial institutions, specifically Citigroup and GE Capital, were going to sell $12 billion in bonds making it the largest week of borrowing since July. GE sold $4 billion of three-year notes at a yield of 2.2%; Citigroup sold $2.5 billion of five-year notes at a yield of 4.5%. While the company song was “the money would be used for general purposes,” both have considerable government-backed debt soon coming due. Also, a consideration has to be that this is a calm in the storm of the European debt crisis. This could be an appropriate time to refinance. 

FYI: Reviewing the Ratings in Europe   Last week, S&P lowered its ratings on nine Eurozone countries. At the same time, they lowered the long-term rating on Europe’s rescue fund, the European Financial Stability Facility (EFSF). However, that entity will be replaced in July 2012 by the European Stability Mechanism (ESM). France lost its AAA rating and it is the Fund’s number two guarantor.

Ed Note:  The Fund currently has adequate resources to meet its lending obligations. By definition, the cost of acquiring additional funds will go up, as will the cost of borrowing from the Fund.

Lending Expansion?   Citigroup, Wells Fargo and J.P. Morgan all saw loan expansion in Q4. Loans outstanding rose by $41 billion from a year ago to $2.4 trillion, the first increase since 2008. For Citigroup, retail banking loans were up 15% and for Wells Fargo, commercial and industrial were up 11%. Some of this would include acquisition of various types of debt from European banks.

Ed Note:  This is a positive sign that Finance Committees should take note of. However, we need further breakdowns and a continuation of the trend before any awards are made to the banks for “hero of the year.” If you subscribe to the economic growth theory that small businesses are the prime creators of new jobs, the question should be, “How aggressive and risk oriented are the banks in reaching out to these markets?”