| Topic Name: |
What HEW Needs |
| Message Name: |
if anything |
| Date Posted: |
02/17/2006 |
| In Reply To: |
I am saying that financial rewards that properly align the incentives of executives and long term shareholders would more properly drive the future direction of the company, if you are seeking to maximize its value as an ongoing entity.
By super-vesting your execs in change of control severance provisions, you are giving them incentives to inflate stock prices in the short term by whittling staff and quality. You are correct, the cost of the actual severance settlements to a suitor is trivial, so it is not a poison pill. But, the potential payout to the named execs by being taken over is non-trivial, thus the perverse incentives from the standpoint of keeping Hewitt an ongoing entity.
Why would a board allow for these provisions to pass? Probably due to the tendency for boards to be yes-men. Unless you really screw things up and send a company down the toilet, Sarbanes-Oxley has little in the way of teeth. Outsiders on boards tend to be outsiders on other boards. Outside board members tend to be compensated well for their services. Being a hardliner and not playing nicely with the CEO is not a good way to get yourself on multiple boards. Combining that with the small equity stake the outsider directors have in the firm means Dale and Bryan get what they want because the consequences to the outsiders are minor.
My point about Buffett, a value-driven investor, was that his disinterest in Hewitt (along with a litany of other potential reasons) may be due to their short-term focus.
The point of diversification was just a warning to the rank-and-file. Having the execs bind a higher fraction of their wealth in firm equity would clearly help the firm in the long run. There's no way to make that happen. Restricted stock is a farce (the risk can be eliminated in the derivatives market) and options again create perverse incentives to manage earnings and do other things that may hurt the long-term viability of the firm.
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| Message: |
many investors would prefer to see management doing MORE to focus on short-term results at the expense of keeping Hewitt an ongoing entity. If there was investor frustration at the purchase of Cyborg or Exult, or the signing of so many new contracts, it was because that meant deferring the recognition of value in order to build a stronger foundation for an ongoing business. What management has done has actually been to focus on the long-term growth of the business despite the pressures from Wall Street to meet quarterly targets. And the stock price has shown it. That management didn't adjust benefits, eliminate free lunch, and cut more staff sooner was probably at least a curiosity to many investors. Management could easily be doing far more in their own interest without even coming close to an ethical line. As for a yes-man board, the largest individual shareholder of Hewitt stock is not Dale, nor Bryan, nor all the top execs put together. It's one board member. He has more Hewitt stock on the line that Dale will accumulate in his lifetime. If you think he is playing nice with the CEO because he wants or needs more board positions, you should do some homework.
It amazes me how people somehow equate going public with some kind of greed on management's part. Before the IPO, fewer than 500 people shared in ALL of the profits. And all of those profits were distributed each year -- nothing was (or could be) retained in the business except for real estate investments and capital expenditures such as new computing and telecom equipment. The hurdle to becoming one of those 500 was getting higher each year. Now people are complaining because they have to pay for lunch instead of realizing that if they all pulled in the same direction, their newfound wealth (even if it is only a few hundred shares or some small amount of options) would pay not only for their lunches for life, but those of their spouses and kids. I think any investor who regularly read this board (and I'm sure the number is VERY small) would probably think "screw the employees, nothing will make them happy, and give us the money."
As for Warren Buffet, what makes you think he's disinterested? What makes you think he's even aware? There are lots of things he doesn't own and it's not because he has evaluated and rejected them all.
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