Justin Fox The Curious Capitalist
Sheldon Adelson: The late bloomer multibillionaire
Sheldon Adelson is really into lists. On a visit to Fortune yesterday, he spent several minutes reeling off the (impressive) academic and other accomplishments of his two daughters--much to the embarrassment of one of them, Sivan, who was sitting next to him.

Before that Adelson (the "ad" is pronounced like advertising, not lemonade) had named all the countries whose populations he expects to draw on to fill the spectacularly immense new hotel/casino/shopping/entertainment complex his company, Las Vegas Sands, is building in Macau, the former Portuguese colony near Hong Kong. He listed the populations, too: Japan, 128 million. South Korea, 44 million. Taiwan, 24 million. And so on.

Adelson paused after mentioning India's 1.1 billion inhabitants--whom he said he really isn't counting as part of his potential customer base. My boss, Eric Pooley, started asking a question. "No, I'm not done yet," Adelson interrupted. "I was having a sip of coffee." He continued: "I forgot about the 1.3 billion in China."

Then it was time for the punch line. "Do you know how many people I need to come each year to make my 20,000 rooms 100 percent occupied? Two million." That's if they stay an average of three-and-a-half nights. Then Adelson started going through the other permutations: What if people stay two nights? Or one night?

"The numbers of people I need to make it work are almost infinitesimal," he said. "It's almost a no-brainer. What bewilders me is that no one else could see it."

This is the third and biggest of the "no-brainer" bets that has made Adelson, 73, perhaps the most spectacular late bloomer in the history of business. The first was his idea that the nascent computer industry really needed a trade show, which led him to launch Comdex in 1979 (he sold it to Softbank in 1995 for $862 million). The next was that Las Vegas's future was in conventions, which led him to to buy the Sands hotel and casino in 1989 and build a huge private exhibition center next to it. (He later blew up the Sands and replaced it with the much fancier Venetian.) And now Macau.

How big is the Far Eastern Las Vegas Adelson's company is creating? Here's the Adelson rundown: The Pentagon is 6.5 million square feet. The new Venetian Macau will be 11 million square feet. Add in the other hotels Adelson is building on the newly filled-in space between two of Macau's islands that he has dubbed the Cotai Strip, and you get 50 million square feet. "That's eight-and-a-half Pentagons," he said, displaying a rare lapse in arithmetic.

Later in the conversation, Adelson went through all the confirmed and potential future sites for Sands-built casinos--Singapore (confirmed), Japan (likely), England (unlikely), Pennsylvania (likely), and somewhere in Southern Europe (way too early to tell).

Then he started talking about his aim to transform medical research by doling out huge grants that require researchers to collaborate and communicate far more than is now the custom. And of course, he listed the affiliations of the 40 researchers he and his wife, a physician, have signed up so far for their first such project, the Miriam and Sheldon Adelson Program in Neural Repair and Rehabilitation: Harvard, Rockefeller U., UCLA, Johns Hopkins, etc., etc.

This is the Sheldon Adelson experience, and it's hugely entertaining--if also tiring. I'd never heard of the guy until Rik Kirkland profiled him in Fortune last fall. But now he's everywhere: The Wall Street Journal put him on page one a few weeks ago, and he just leapt to No. 3 (from 15 last year and 60 in 2004) on some other business magazine's list of the 400 richest Americans. He'd taped an interview with Charlie Rose earlier yesterday, and appeared to be greatly enjoying his late arrival as one of the world's business giants.

We didn't get around to what is said to be one of the most entertaining, if frightening, Adelson experiences: Seeing how he reacts when you say nice things about his better-known competitor Steve Wynn (who is also building in Macau, but on a much smaller scale). But it may be that Adelson is interested in a new rivalry now, with the two guys ahead of him on the Forbes rich list: Bill Gates and Warren Buffett.

"People ask, 'Do you want to be No. 1 or No. 2 now that you're No. 3?'" said Adelson, whose 70 percent stake in Las Vegas Sands was valued at about $17 billion this morning (and who has a couple billion dollars more on the side). He left the question alone for a while. But then he returned to it later, after extolling the uniquely profitable and reliable nature of the gambling business.

"They talk about, 'Can you become No. 1 or No. 2? ... It seems to me that it's kind of in the cards."
Posted by Justin Fox 11:20 AM 4 Comments comment | Add a Comment

The Internet changes everything, including phones
I had lunch yesterday (paid for, don't you worry, by the long-suffering shareholders of my employer, Time Warner) with the new CEO of Avaya, Lou D'Ambrosio.

Avaya was the dowdy stepchild of Lucent, spun off in Oct. 2000 so the glamorous parent could concentrate on "next-generation communications networks." The Internet was changing everything, so Lucent stuck Avaya with pre-Internet businesses like telephones and voice mail.

What's happened since? Lucent imploded. Avaya, while it has certainly had some troubles of its own, has done an awful lot better.

This sounds a little bit like what's been going on lately with Viacom and CBS, where the supposedly slow-growth half of the company has outperformed its glamorous former spouse since the two broke up at the beginning of this year. That makes two examples of the duller party prevailing in a spinoff, which is tantalizingly close to three, the magic number at which journalists are officially allowed to declare the existence of a trend. It's better to be dowdy! It's better to be dowdy!

But D'Ambrosio, who was head of global sales and marketing for Avaya before taking over as CEO in July, steered me in a different direction. It wasn't dowdiness that saved Avaya, but VOIP. Four years ago, he said, 20 percent of new business phone lines used voice-over-internet-protocol. Now it's 60 percent.

The initial selling point was that VOIP costs a lot less than conventional phone service. But VOIP also makes phones vastly more versatile, allowing Avaya to sell all sorts of add-on services. D'Ambrosio regaled me with tales of how the Avaya phones at Wynn Las Vegas steer guests to the hotel/casino's fancy shops. Jocelyne Attal, the Avaya chief marketing officer who was also there at lunch, tried to interest me in linking my Avaya office phone to my cell phone. (No thanks!)

So yeah, the Internet did change everything. What Lucent missed was that one of things it would transform was the telephone.
Posted by Justin Fox 6:04 PM 1 Comments comment | Add a Comment

Is corporate governance really broken?
Professor Stephen Bainbridge of the UCLA School of Law was not impressed with my essay last week on "Who needs a board of directors, anyway?"

"It's a very good question," he wrote in his blog, ProfessorBainbridge.com. "Unfortunately, he [me, that is] offers a very bad answer." Bainbridge's main complaint appears to be that I attributed the existence of the corporate board of directors to historical factors. He's a law and economics guy, which means he's dubious of explanations like that. If corporations have boards of directors, there must be an economic reason for it.

I'm actually pretty sympathetic to such arguments. Business practices don't survive for centuries unless they help make somebody money. But the article (it's a pdf file, so I don't want to link without warning, but here it is) I cited by University of the Pacific law professor Frank Gevurtz did posit an economic reason for boards' survival: that they make the existence of large corporations, which are important engines of our economy, palatable to the citizenry.

That may not be an entirely convincing explanation, but neither is Bainbridge's. He says boards exist because groups make better decisions than individuals. That in itself is debatable--although Bainbridge marshals an array of empirical evidence to back it up. But even if it's true, Gevurtz points out, the chief decisionmaking group at most large corporations is top management, not the board.

So where does that leave us? Confused. The board of directors isn't going away, but neither does it appear capable of reliably serving the role envisioned for it in law--that of ultimate decisionmaker at a corporation.

The big question, really, is whether we need to do anything about this. Most of the commenters to my original post seemed to think we do. "Boards would be fine if they were truly elected by shareholders," wrote Dale Lamm of Canton, Ohio, expressing a sentiment shared by several others.

As it stands now, board nominees are chosen by the existing board and management and almost always run unopposed. A couple years ago, the SEC proposed changing proxy rules to enable large, long-term shareholders to place candidates on a company's director ballot--but opposition from corporate executives kept the plan from getting anywhere.

Bainbridge opposed the proposal, too. His key objection, as he put it in his comment letter to the SEC, was this:

Large-scale investor involvement in corporate decisionmaking seems likely to disrupt the very mechanism that makes the public corporation practicable; namely, the centralization of essentially non-reviewable decisionmaking authority in the board of directors. The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, as some have suggested, but rather that it provides a hierarchical decisionmaking structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs. In such a firm, someone must be in charge ...

My sense is that there's a continuum of shareholder involvement in corporate decisionmaking, and over the past two decades in the United States we have gone from almost none to a little. The SEC proposal would have pushed things slightly farther in that same direction, but I find it hard to believe that it would have dramatically shifted the balance.

Do we need to dramatically shift the balance? Well, it depends whether you think corporate America is a pit of self-dealing, waste, and fraud or a spectacularly successful economic endeavor marred by occasional breakdowns and more frequent blind spots. However sympathetic I am to the arguments of the Jack Bogles and Bob Monkses of the world, I invariably find myself landing in the latter camp. So I'm basically a fellow traveler of Stephen Bainbridge. (Which bums me out, because I'd been hoping to milk this into a debate that dragged on for months.)

Finally, for those of you who went to the trouble to read Bainbridge's post: He claims that a couple of my descriptions of changes in corporate governance through the years (the decline of shareholder and creditor power in the first few decades of the 20th century, and the modest rise in shareholder clout in recent years) are factually incorrect. That's a bit much. The real story is that I was repeating the standard history, while Bainbridge favors the work of a few revisionist scholars who have chipped away at the edges of it.
Posted by Justin Fox 9:16 PM 5 Comments comment | Add a Comment

Faith Popcorn gave me her mouse pad!
The mouse pad pictured at left used to belong to famed trendinista Faith Popcorn, who grabbed it off her desk and handed it over to me this morning so I could read the list printed upon it of 17 trends that guide her firm's work. Then she told me to keep it.

I've been using it for a couple of hours now in place of my usual "Time Warner by the numbers" pad. What can I report? That the surface on the Popcorn pad is a little slick for my taste, and that there's something unnerving about gazing constantly at the 17 trends listed upon it. They identify societal phenomena that marketers can take advantage of or need to watch out for.

Most famous is "Cocooning: The need to protect oneself from the harsh, unpredictable realities of the outside world." But there's also "Down-Aging: Nostalgic for their carefree childhood, baby boomers find comfort in familiar pursuits and products for their youth." And "EGOnomics: To offset a de-personalized society, consumers crave recognition of their individuality." And so on.

I don't dispute the validity of any of these. I'm just worried that if I keep looking at the list every day, I will eventually find that my personal attitudes and beliefs have adjusted themselves to conform to Faith-Popcorn-certified trends. So Faith, you can have the mouse pad back.

UPDATE: The snotty tone of this post has led some to speculate that I don't like Faith Popcorn. I do like her. She's really nice. I mean, she gave me her mouse pad! I just don't want it anymore. (Maybe I should have just tried selling it on eBay.)
Posted by Justin Fox 4:18 PM 0 Comments comment | Add a Comment

Managing what you measure
Nobel prize-winning economist Joe Stiglitz has an interesting essay in the current Fortune about the deficiencies of gross domestic product as a measure of economic health. Lots of people have been criticizing GDP these days: Some focus on the inability of economic numbers to reflect true well-being. Others worry that our methods for measuring inflation are skewing real GDP growth either upward or downward.

Stiglitz takes aim at the failure of GDP to factor in the depletion of resources. A country can boost GDP by strip-mining with abandon or cutting down all its trees, even though both actions probably leave it less well-off.

The alternative that Stiglitz endorses is "green net national income," a measure you can learn more about here. The idea is to incorporate financial and physical assets, and the depreciation thereof, into national accounting--as is already done in corporate financial accounting.

The upshot is supposed to be better decisionmaking. As Stiglitz writes: "A government focused on GDP might be encouraged to give away mining or oil concessions; a focus on green NNP might make it realize that the country risks being worse off." Sounds reasonable.

There would be a certain irony, though, in moving from cash-flow-based national economic accounts to a measure modeled on corporate earnings. It is, after all, pretty standard investing advice to ignore earnings and focus instead on cash flow, because earnings are so colored by estimates and assumptions and thus easy to manipulate. Would "green NNP" be any different?

The lesson here is that any single measure of a country's or a corporation's well-being is bound to be deeply flawed. Since most of us are prone to fixating on just one, we should of course try to arrive at the best single measure possible. But truly intelligent economic decisionmaking will always require looking beyond it.
Posted by Justin Fox 3:33 PM 3 Comments comment | Add a Comment

Blame the bag, not the spinach
I just stumbled across this fascinating post in the food blog Chez Pim. It's by Andy Griffin, a California organic farmer who was a pioneer in the bagged-baby-greens business that is at the heart of the FDA's spinach crackdown. If fresh spinach is a part of your life, I'd recommend reading the whole thing, but the money quote is this:

Although the victims got sick by eating spinach from a sealed bag it's wrong to seize on spinach as the culprit in the controversy; it makes more sense to look at the processing and handling of pre-packaged greens in general. Put another way, it's the harvest procedures that were followed, the pre-washed claim made for the greens, and the bagged environment the greens are in that are the relevant issues, not the specific variety of leafy greens that were actually contaminated at some point during the harvest and post harvest handling.

Basically, the dirty bunch of spinach you pick up at a farmer's market or even a supermarket (or at least could before the FDA banned the stuff) probably isn't a problem. It's the pristine-looking stuff in the bags that's a problem.

As someone who eats a lot of spinach (usually sauteed with anchovies and garlic; it sounds weird, but it really is good), this is obviously of great interest to me. But it's also another fascinating chapter in the economic and culinary saga of the produce business. Until about a half century ago you were mostly stuck with what was grown locally, plus some especially hardy stuff like bananas and oranges and potatoes. Then came interstate highways and refrigerated trucks and supermarket produce sections full of California lettuce in the middle of winter.

Much has been gained, but also much lost. (See Michael Pollan's The Omnivore's Dilemma.) The biggest disaster, in my opinion, has been the ubiquitous flavorless tomato--an agricultural misstep that has only begun to be undone in recent years by the return of heirloom tomatoes in summer and those hydroponically grown Mexican grape tomatoes in winter.

Anyway, over the past decade, cute little organically grown greens of a sort previously found only in back gardens, farmers markets, and fancy restaurants have arrived by the prewashed-plastic-bag-full in supermarkets everywhere. That's economic progress, I think. But as we're seeing, it is not costless progress.

UPDATE: The spinach-with-anchovies recipe is here.
Posted by Justin Fox 3:18 PM 0 Comments comment | Add a Comment

When behaving ethically is a competitive advantage
Dov Seidman, the CEO of LRN, dropped by earlier this week. He's visited before, and I haven't known what to make of what he's selling. LRN started out in 1992 as a legal research network (LRN, get it?) that law firms could outsource projects to, then got into compliance training for corporations, and now is all about training aimed at "inspiring principled performance."

Yeah, whatever--I generally prefer to leave high-minded stuff like that to my colleague Marc Gunther. But the continuing stream of alarming news out of Hewlett-Packard has started to make some of the things Seidman says ring true. If you focus on compliance with rules, he argues, you inevitably get the kind of behavior seen at HP, where the discussion about spying on board members seemed to focus entirely on what might be legal rather than what was right. The only way to prevent such missteps, Seidman says, is to have a corporate culture in which such shenanigans are frowned upon.

The funny thing is, HP used to be famous for having such a strong culture. Companies with the founders still around usually do. "Then," says Seidman, "they get lazy and start writing these dumb rules."

Seidman says culture can be a major competitive advantage for companies. Sounds reasonable. He also thinks it can be inculcated, not just developed organically. We'll see about that.

UPDATE: In the comments section below, FORTUNE's Marc Gunther has a nice post about how good employees want to work for companies with good values. Again, I'm always dubious of corporate talk about "values" and "culture" because so often it's just talk. But I absolutely agree that most people want to feel that their work has a purpose, and companies can gain an advantage by giving them that feeling.
Posted by Justin Fox 8:11 AM 2 Comments comment | Add a Comment

When leaking is the right thing to do
Most of the media coverage of HP's scandal, including my own modest effort, has gone out from the assumption that corporate leaking isn't nearly as bad as corporate spying. Of course we journalists think that, right? We've never met a leak we don't like.

From the perspective of a shareholder in a publicly traded corporation, though, there are times when you want the board members to be blabbermouths, and times when you don't.

The clearest example of the first case is where a director becomes convinced that management is harming shareholder interests. As Warren Buffett put it in his 1993 letter to Berkshire Hathaway shareholders,
a director who sees something he doesn't like should attempt to persuade the other directors of his views. If he is successful, the board will have the muscle to make the appropriate change. Suppose, though, that the unhappy director can't get other directors to agree with him. He should then feel free to make his views known to the absentee owners.
For a company with shares as widely held as HP's, the absentee owners are everybody with a 401(k) and then some. Talking to the press is the simplest way for a disgruntled director to communicate with them. (Although these days he could also of course start a blog.)

The most ethically blameless course is to share one's disgruntledness openly, providing quotes with name attached. That's what HP heir and board member Walter Hewlett did when he came out against the company's merger with Compaq in late 2001. In the process, though, Hewlett entirely burned his bridges with company management and most of his fellow directors. Not every disgruntled director is that disgruntled. So it's not hard to imagine cases where a director shares his concerns anonymously, yet is legitimately looking out for the best interest of shareholders. A clear example of this can be found here, and a defense of such behavior here.

On the other hand, it's pretty clearly not appropriate for a board member to divulge new products or strategies that management would prefer to keep under wraps. And sharing the details of board debates, while it can make for great journalism, can have a chilling effect on discussion that doesn't do shareholders any good.

So where do HP's leaks fit in the spectrum? I confess not to have read every last article written about the company from 2001 onward, but I suspect that a significant amount of the boardroom leaking in the final years of Carly Fiorina's controversial reign fell in a netherworld between looking out for shareholders' interests and just plain gossiping.

The particular CNET News article that got veteran director George Keyworth in trouble, though, was in a strange category of its own. In it, he anonymously discussed a board retreat and some of the long-term HP priorities that were outlined by management there. None of what he said surprised anybody who followed the company closely, but it's understandable that CEO Mark Hurd was irked by it: What if executives had brought up something top-secret at the retreat?

When he resigned from the board Sept. 12, Keyworth said he had merely been trying to spread HP's PR message, something he had been encouraged to do in the past by company executives. If that's the case, though, why didn't he consult with Hurd or other HP executives first?

Which brings us back pretty much to where we started. The leaking was at best questionable. The spying was at best dead wrong. And now, as Hurd has been directly linked to the spy campaign for the first time, it's starting to be bad news for shareholders.
Posted by Justin Fox 12:22 PM 1 Comments comment | Add a Comment

Who needs a board of directors, anyway?
While contemplating the strange mess that Hewlett-Packard's board of directors has gotten itself into, one of my FORTUNE colleagues asked last week, "Why do companies have boards of directors, anyway?"

Why indeed? I did a little checking (starting with the strenuous act of going to SSRN and searching on "corporate board history"), and discovered that legal scholars have been asking themselves the same question for a while now, and struggling to come up with a convincing answer.

The problem is that the historical purposes for which boards evolved no longer apply, and the task they are now expected to fill--that of vigilant monitors of CEO pay and performance--is one for which they are ill-suited. So why don't we abolish the institution? Perhaps because the two main alternatives just seem so weird. More on that later. But first, a little history.

In a fascinating if very long 2004 article (available as a pdf here) in the Hofstra Law Review, Franklin A. Gevurtz of the University of the Pacific's McGeorge School of Law locates modern boards' historical roots in medieval town councils and guild leaderships (whose memberships often overlapped). The guild boards were mainly occupied with resolving disputes between members--an entirely different function from that of today's boards. But as the guilds evolved into companies of independent merchants, the merchant companies into trading companies in which the merchant-investors pooled their money to outfit ships to sail to faraway ports, and the trading companies into modern corporations, the institution of the board came along for the ride.

Still, as recently as the early 1900s, the board had a pretty clear function. It was the perch from which big shareholders and creditors watched carefully over the men they had hired to manage their companies (as is true today at companies controlled by private equity firms). But the very success of some of these pioneers of industrial capitalism led to the undoing of this model. Corporations outlived their founding shareholders, outgrew the need to borrow money, and, as the stock market captured the public imagination in the 1920s, found their shares in the hands of thousands of small investors in no position to watch carefully over anything. Managers naturally took charge, and boards became appendages entirely beholden to them.

That's how things stayed through the 1960s, and on the whole you'd have to say it worked okay. CEOs decided what to do, boards rubber-stamped their decisions, and the U.S. mostly prospered. In the 1970s, though, the world changed dramatically. Corporate strategies that had worked well in a time of steady growth, low energy prices, and the absence of foreign competition began to founder. The country could probably have used a few strong boards unafraid to change course and throw out a CEO, but those didn't exist. What we got instead was the phenomenon of corporate raiders, junk-bond-funded upstarts who bought floundering companies out from under their managers. In many cases the raiders did a better job of running the companies, in others they drove them into bankruptcy. And in response, corporate executives successfully lobbied state legislatures to make hostile takeovers much harder.

In the meantime, stock ownership was becoming reconcentrated in the hands of huge pension funds and mutual funds whose managers were far less patient and far more able to make their impatience known than small individual investors were. For various reasons, though, they were not willing to sit on corporate boards. So what we got was the modern board, whose members are expected to hire and fire CEOs and monitor their performance on behalf of shareholders, but are themselves mostly part-timers with insignificant ownership stakes who remain more or less beholden to the CEO for their jobs. (The formal legal requirements of the modern board evolved a bit differently, as you can read here, but ended up in pretty much the same place.)

Under pressure from shareholders, some of these boards have thrown out CEOs, perhaps most notably at General Motors in 1993 and HP last year. But there have been far more cases of boards failing to rein in out-of-control chief executives (think Enron, Worldcom, HealthSouth), and a zillion Sarbanes-Oxley Acts won't change that. The incentives simply aren't there for board members to play the role of monitor and do it consistently well.

This is not to say there aren't lots of sage and diligent board members who add value by virtue of the advice and guidance they give. But a CEO who is willing to listen to the sage advice of a board member would presumably be just as willing to listen to the same wise person hired as a consultant. The institution of the board doesn't matter.

So what are the alternatives? Well, there's direct democracy--putting all major corporate decisions, including the choice of a new CEO, to a shareholder vote. And then there's absolute corporate monarchy--allowing management to make all the decisions without oversight. Law professor Gevurtz sees strengths in both. Shareholders "know as much as boards do," he says. On the other hand there are lots of successful investment vehicles (hedge funds, for example) that aren't governed by boards or subject to shareholder votes. Unhappy shareholders can simply vote with their feet.

However, even after observing in his article that boards have a lot in common with tonsils ("a largely useless, if mostly harmless, institution"), Gevurtz shies away from recommending their abolition. Why? Because direct shareholder democracy isn't going to happen (the nation's CEOs would be violently opposed) and corporate monarchy, while perhaps a more honest representation of the true power relationship in corporations, just wouldn't feel right. "If you had self-perpetuating management and no representation, people would question why that was," he says. "There's this feeling that managers shouldn't be in charge of these large aggregations of power, even though that's the way it is." So that's why companies have boards of directors: To make the rest of us accept their existence.

UPDATE: UCLA law professor Stephen Bainbridge has written a detailed analysis of why I'm full of baloney. I will offer up an explanation next week of why there's more to my argument than just processed meat product, but in the meantime check out Bainbridge's cool wine blog. My response is here.
Posted by Justin Fox 9:39 AM 11 Comments comment | Add a Comment

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.