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Three Gs: Greece, greed & greatness.

Greece: There's an NPR program called "Planet Money." I like the fact that the show often explains things in a contrarian way. In other words, "Planet Money" isn't in any way, shape or form like any other morning or evening radio show, TV program or network. It tends to dig w-a-a-y deep--political correctness be damned. "Planet Money" had a guest on board one day in February who actually did some work for the Greek government. He had figured out the why of how Greece was in trouble, which seemed, to a great extent, to be due to the fact that Greeks are often tax cheats, he said.

The typical method of cheating is to understate incomes and/or bribe a local tax collector. So, many of the people in Greece who are rioting in the streets about the harsh reforms they must swallow are the same people who caused the problem by not paying taxes.

Have you ever, like me, wondered why the sunny places have economic problems? Germany, which is not known for sunny beaches, seems to be fine. Ditto Switzerland, China and even the Scandinavian countries. However, sunny places like Portugal, Spain, Italy and Greece (and, in the United States, California, Florida and Nevada), all seem to have problems. This does not explain Illinois, of course, but you take the point, right?

Speaking of "Planet Money" and other shows that I like, I no longer need to download them to my phone. Instead, I use Stitcher, a free program that categorizes them and automatically updates in seconds each morning. (Go to www.stitcher.com and learn about hundreds of shows from across the world; Stitcher works on the iPad, too.)

Greed: I have for years written about the fact that economics controls the high wages and benefits given to CEOs. It's just like baseball or football--to get top talent, a company (or a team) must pay. Unfortunately, it's become an accepted norm to overpay by a wide margin. The contract between a company and its CEO is of little value to shareholders, since the overpayments to him or her take away from dividends or stock buybacks that truly benefit company owners.

The CEO candidate being wooed (or his agent), knows that if he screws up badly, his name will be mud. Therefore, the candidate (and his or her agent) negotiates the best parachute deal possible, since, if things go badly, he or she may never work again.

Boards looking for a new CEO expect to pay for talent. There is no incentive for the board to negotiate a good deal for the shareholders, and so they open the purse strings and money flies into the pockets or purse of the new guy or gal. Boards are easily confused and often think they should do best for the company and not necessarily for the shareholders. So, instead of performance-based compensation, the board provides what I refer to as show-up pay--all the CEO needs to do is to appear at work. He or she can probably get away with that for a year or two, or maybe even stretch it to three. The board then wises up, and there's a hunt for a replacement. The show-up guy or gal walks away with $80 million or so and may even have the right to use an office and secretary, paid for by the company, for a number of months or years.

In my view, the only good compensation for CEOs is performance-based pay. If there is success, the rewards are great. If there is no success, there is reasonable parachute pay, but not golden parachute pay. After all, if the guy or gal does not succeed, why pay big dollars for failure? If there is negligence (neglect of duties), there should be no pay. Any other kind of officer compensation rapes the shareholders, and the shareholders own the company and deserve to be treated fairly and well.

The board represents the shareholders who own the company. The board does not work for the company; it works for the company's owners. There seems to be some confusion about that in many companies around the globe, but not in one company, and that company is Berkshire Hathaway.

Greatness: I was struck, in reading Barry James Dyke's new "The Pirates of Manhattan II: Highway to Serfdom" (see Broker's Bookcase) by how much political appointees earn--not from their government jobs, but from public speaking. For example, according to information in the book, Larry Summers, who became chairman of the Council of Economic Advisors for President Obama, earned over $2 million from speeches in 2008.

Indeed, reading Dyke's latest, one has a not-very-pretty picture of the best and brightest of government and industry. Maybe Eisenhower's famous warning to "beware the military-industrial complex" should have lasered in on politicians and financial CEOs, too.

The good man: On the other hand, Warren Buffett seems to always try to do the right thing. He earns $100,000 yearly as chairman of Berkshire Hathaway and makes most of his money by producing excellent returns for shareholders by making the shares worth more and more. The price of the stock increases (and has been quite steadily growing, with only a few burps, since 1965) and therefore--since he owns a great slice of the shares--he gets richer and, in fact, is, at times, the richest man on the planet. This is a lesson that seems lost on the CEOs of Wall Street, who seem in the game for the short term. They want to insure that they are instantly wealthy and don't much like any risk at all.

In the Dyke book, WB is quoted at one point: "While the poor and middle class fight for us in Afghanistan and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as carried interests, thereby getting a bargain 15% tax rate. Others own stock index futures for 10 minutes and have 60% of their gain taxed at 15%, as if they'd been long-term investors ... These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It's nice to have friends in high places." (Carried interests are most often income to private equity managers, who are permitted to pay a much lower tax rate of 15% on income--think Mitt Romney and Bain Capital, for example.)

You may agree or disagree with Mr. Buffett's pronouncements about taxes. I suggest, though, that his heart is in the right place. I like and respect him for his wit and wisdom and for the years of taking good care of other Berkshire shareholders. At times, I wish he would not be so vocal about politics and taxes.

At times, companies come along that are thought of as "new" Berkshire Hathaways. However, management and boards are not shareholder-oriented like Berkshire, and things for such imitators always seem to fizzle in the end. What I don't understand is this: why are not all boards and officer groups shareholder-oriented? Look at how well it works for Berkshire Hathaway. Its A-shares are priced, at this writing, at $120,000 each. How's that for protecting the shareholder?

This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, one may receive more or less than originally invested.

A Richard Hoe, ChFC, CLU, AEP, has been an investment professional for 42 years and is a member of Prosperity Network's five-person investment team, as well as an investment advisor representative and registered representative. Paul Ewing's Kansas City-based Prosperity Advisory Group has over $2 billion in AUM. Mr. Hoe has been writing professionally for more than 50 years and is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University that offers an M.B.A. in financial planning. He is a member of both the Society of Financial Service Professionals and the Financial Planning Association. He helps edit each edition of Andy Kilpatrick's "Of Permanent Value," a book about Warren Buffett and Berkshire Hathaway published yearly in advance of each shareholder meeting. Readers may e-mail Richard Hoe at richardhoe@richardhoe.com.
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Title Annotation:THE INVESTMENT EDGE
Author:Hoe, Richard
Publication:Life Insurance Selling
Geographic Code:4EUGR
Date:Apr 1, 2012
Words:1445
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