David Jacobson's External Insights

Trends in Australian CEO contract terms

As the new CEO packages at Telstra and Commonwealth Bank  have had a lot of publicity, I thought it was only fair that I  look at some other current remuneration arrangements to see if there are any trends for listed public companies.

The main trend is that fixed-term contracts are on the wane.  This reflects reality:  a 5 year contract with a 3 month termination period is really only a 3 month contract. Removal of a fixed term recognises that such contracts may not provide any extra security for either the CEO or the company and could in fact send wrong messages to employees and the market.

Instead companies  are now adopting "rolling contracts" with no fixed term but with set notice periods which protect both the CEO and the company (for "without cause" termination typically the company must give 12 months notice and the employee must give 3 to 6 months' notice) . Such contracts also contain a mix of short to long term incentives  for the CEO to stay and perform. (see Qantas' Executive Remuneration Philosophy)

The final contract will contain a balance between term, notice requirements and short, medium and long term incentives recognising the goals of both parties.

A company's approach may vary depending on whether it is retaining an existing successful CEO, hiring an external "change agent" or employing someone (possibly internally) to maintain the company's existing culture.

So, who's doing what?

Fixed terms: NAB, Westpac, Bank of Queensland.
Rolling contracts (in addition to Telstra, CBA): Coles Myer, St.George, BHP Billiton.
UPDATE 14 July: Wesfarmers
 

Open Business Guide

The Open Business Guide is a project supported by George Soros' Open Society Institute that aims to establish a "Commercial Commons" by collecting a wide range of business models, case studies and business strategies. The organizers hope to "share, mix and facilitate the spread of innovative business ideas".

The site is a wiki so that you can add to it as well as view it.

via Fast Company

Emails, organisation networks and knowledge management: 3 questions you need to answer

Do you know who is emailing who in your organisation?

Do you know what they are emailing each other about?

Do you know how your organisation's emails are archived?

There are regular news stories about the need to write emails prudently and to have a system for their destruction (see here and here).

Even though Arthur Andersen's conviction for obstruction of justice by wrongful destruction of evidence relating to Enron  has been overturned on appeal (as no criminal intention was proved), the discussion about the use of emails in Enron has provided an insight into the ways people communicate with each other inside organisations and who they communicate with.

In HBS Working Knowledge's How organisation charts lie the authors argue that :

Whether as a manager presiding over a department or as a member embedded within one, we are all dramatically affected by information flow and webs of relationships within social networks. These networks often are not depicted on any formal chart, but they are intricately intertwined with an organization's performance, the way it develops and executes strategy, and its ability to innovate. For most of us, networks also have a great deal to do with our personal productivity, learning, and career success...

Even in small, contained groups, executives are often surprised by patterns of collaboration that are quite different from their beliefs and from the formal organization chart. Getting an accurate view of a network helps with managerial decision making and informs targeted efforts to promote effective collaboration. Rather than leave the inner workings of a network to chance, executives can leverage the insights of a social network analysis to address critical disconnects or rigidities in networks and create a sense-and-respond capability deep within the organization.

In Enron's 1.5-Million Emails:  A Window Into Knowledge Management? Bruce MacEwen quotes a professor of computer science who was interviewed in  a NY Times story:

"Companies have organizational charts, but they reveal little  about how things really work, Dr. Carley said. Companies actually operate through informal networks, which can be revealed by analyzing "who spends time talking to whom, who are the power brokers, who are the hidden individuals who have to know what's going on," she said."

Knowing who is talking to who and about what is important from the point of view of productivity, collaboration and knowledge management.

Knowing where your emails are can also prove important if you are a defendant in a legal action.

Recently JP Morgan  Morgan Stanley was fined $2.1million for  overwriting backup tapes containing archived emails after a judge ordered they be produced in legal proceedings.

Do you have policies regarding the use of technology (including email) in your office?

Business management reading

Fast Company Now has drawn my attention to Knowledge@Wharton. Current items of interest include Wikis, Weblogs and RSS: What Does the New Internet Mean for Business?  and Good Managers Focus on Employees' Strengths, Not Weaknesses .

Tom Peters Wire Service has announced the launch of Columbia Ideas at Work, the Columbia Business School's new online knowledge portal.

And Brand Autopsy has listed the service related books he recommends in his MBA class.

Have a good weekend!

Another new CEO: Commonwealth Bank of Australia

Within days of Telstra, Australia's largest telco, announcing its new CEO, one of Australia's largest banks, the Commonwealth Bank of Australia has announced its new CEO, Ralph Norris.

As in the case of Telstra, the CBA has disclosed its CEO remuneration agreement to the ASX.  Whilst Telstra's was in the form of a concise letter of appointment, CBA's consists of a 2 page covering letter containing some transitional arrangements plus a formal 20 page "Executive Service Agreement".

As with Telstra, CBA's CEO remuneration has 3 elements: base remuneration of $1.9 million per annum, a discretionary annual cash short term incentive of up to $1.9 million and an initial long term incentive allocation of Bank shares to the value of $3.8 million, subject to shareholder approval, achievement of performance hurdles determined by the Board and any necessary regulatory consent.

Similar to Telstra, the service agreement has no fixed term.

However the termination provisions are different. Whereas Telstra or its CEO can terminate on 30 days notice (with penalties early in the term), CBA's new CEO must give 6 months' notice whilst CBA can terminate on 12 months' notice in the first year and 6 months after that. There are the usual rights of CBA to terminate immediately for misconduct.

The differences are interesting: Telstra is about to go through a period of change involving privatisation. CBA has nearly finished its culture change project after privatising some time ago. The differing requirements for a CEO are relected in their employment terms.

CEO remuneration disclosure: Telstra

Telstra is Australia's largest telco. It is also in the process of being privatised, with the Government's majority shareholding about to be sold.

So when it appointed a new CEO this week there was a lot of interest. Sol Trujillo will become Telstra's CEO on 1 July 2005.

The business media interviews with Trujillo have been probing (for example Alan Kohler's interview on ABC TV's Inside Business).

What has been interesting is the level of Telstra's  disclosure in accordance with the ASX Corporate Governance Principles (especially Principle 9 which says " disclosing the remuneration policy is a fundamental requirement for remuneration reporting. The interests of shareholders and the market are best served through a transparent and readily understandable framework for executive compensation and its costs and benefits").

Telstra has released a copy of its contract with Trujillo (in the form of a letter of offer of employment). While the dollars are interesting (AU$3million per annum fixed plus bonus payments depending on meeting unspecified performance targets plus a $1million sign on fee with $1.5million of his first year's bonus paid in advance on sign on)  the contract implicitly says some things about the way Telstra may evolve in the future through its termination provisions:

• the contract is not for a fixed term, either party can terminate on 30 days notice;
• but if the board terminates without good reason (in which case there are special provisions) within the first 12 months Trujillo gets 24 months termination pay;
• if Trujillo terminates within the first 3 years, there are special provisions;
• if Trujillo terminates because of a takeover of Telstra there are special provisions.

Rather than focus on the amounts, it is important to look at an employment contract as a possible plan for the future. What this contract says is that the parties are giving themselves a 2-3 year "look see" term during which Trujillo has to finish Telstra's privatisation.  After that, Telstra is keeping its options open.

DISCLOSURE: I have a small shareholding in Telstra, bought in Telstra 2 which is currently in the red.

When "yes" is the wrong answer

HBS Working Knowledge's article "Don't Listen to Yes" argues that when your organisation is making a decision there needs to be some conflict, that getting "yes" answers all the time may not achieve the best result. Of course, having a culture of "no" or a culture of "maybe" has its own problems.

Some key quotes:

the lack of good conflict—constructive conflict—within an organization makes it that much harder to accurately evaluate business ideas and make important decisions...

By inducing vigorous and open debate, leaders avoid the guessing game of trying to discern whether or not people truly agree with a choice that has been made...

To be effective, leaders need to ensure that conflict remains constructive. That is, they must stimulate task-oriented disagreement and debate while trying to minimize interpersonal conflict. Leaders can accomplish this by taking concrete steps before, during, and after a critical decision process.

Strategic venture capital: what entrepreneurs should look for

John Hummelstad, Asia Pacific Executive, Venture Development, IBM Venture Capital Group spoke at a Founders Forum meeting yesterday.

His key points for early stage companies looking for venture capital:

• look for an investor that can add value, not one that comes in just waiting for the time to get out.
• don't choose a VC simply because they offer money.
• the VC's ratio of staff should not be more than 1 professional per every 5 active companies they invest in.
• the VC should offer new skills (especially marketing and organisational), broad networks, new thinking and have interests aligned with yours. In other words, they should be able to take you to the next round of funding.
• ask for examples of companies the VC has invested in and the industries they are involved with.
• don't overstate your potential market size, do research showing how you can get to it.
• get realistic valuation data.
• allow at least 6 months' networking before you find your VC money.
• don't look for VC unless you have at least $1.5M per annum revenue, until then rely on family, friends, angels.
• have a milestone based plan for using the money.
• be open and honest.
• be persistent, the success rate of getting VC money is 1 for every 100 businesses.

How not to franchise: the Krispy Kreme experience

CFO.com's article "Kremed!" looks at the history of Krispy Kreme from going public, rapidly franchising (and losing its mystique) to its financial mis-statement problems.

The franchisees have accused it of "channel stuffing" (forcing them to buy product before the end of a reporting period) and not acting in their best interests.

Making credible negotiation threats

You've planned your negotiation tactics. You've worked out your bottom line and at what point you will walk out. How can you make sure that the other party understands your point of no return and that you will make good your threat to walk?

This article discusses 6 strategies to helping you convince the other party that you mean what you say. I prefer number 5:

Create and leverage a reputation for making credible threats
Your threats will be more credible if you have a reputation for carrying through on them. If you are known for sometimes being rash or obstinate, even your more extreme threats are likely to be taken seriously. Your threats also may be effective if you have a reputation for staying true to your word or for being willing to sacrifice dollars for principle.

Some negotiators intentionally bargain hard every time to create reputational capital, which entails an investment (in this example, in how you are perceived) that helps to earn a return when your reputation is on the line. Thus, investment in reputational capital often entails sacrificing short-term gains in return for long-term profit. For example, some negotiators are habitually straightforward, guarding their integrity with great care despite the potential for short-term financial loss. The return on this investment comes in the form of influence stemming from the increased credibility of future promises, commitments, and threats.