Warby Parker and Harry’s Founder Interview

I just got off a Zoom webinar where Jeffrey Raider, a founder of both Warby Parker and Harry’s (the shaving company), spoke about his approach to innovation and the growth of his two multi-billion-dollar companies. Notable take-aways follow:

Each company was built digitally but is viewed as branded companies and thus product finds its way into brick-and-mortar.  The reason is simple: that is where a large part of the market resides.  The companies started on-line but the management view is “customer first” and not “digital first.”

Each company was founded based upon perceived need in the market-place.  If you want to start a company, “ask what upsets you” in the consumer experience.  Examples: glasses too expensive due to various mark-ups taken in various steps delivering product; razor blades were far too expensive; waiting for a taxi was aggravating (reference presumably to birth of Uber et al).  (Per the interviewer, Harvard Professor Jeffrey Rayport, founders should fall in love with the problem, not the solution.)

Harry’s was built in some measure by deep involvement with customers to find out what they wanted.  Digital engagement was successful and, for example, when customers were asked for reactions, one email was opened by 50% of recipients and responded to by 10%.

Warby’s was conceived  by Wharton students while still in school.  Not an unusual story, but interesting nonetheless.

Btw, kudos to C Level Community, a company affiliated with the Neptune Advisory Company, for organizing programs with leading corporate presidents and founders; the program with Raider was one of them.

PE, Hedge Fund Fees in SEC Gunsights

I have written here, and in my recent article (Fall 2021 issue in Massachusetts InHouse) about the activist agenda of the Democratic-controlled SEC under Chair Gary Gensler.  Yesterday, Gensler furthered that agenda by announcing that the SEC will address transparency in fees paid to sponsors of PE and hedge funds.

The SEC cannot attack substance, in the sense that the amount of fees taken by the sponsor-operators of these funds is a matter of freedom of contract.  But every dollar going to these folks is indeed a dollar less going to the investors.  The SEC is of the view that funds are not making sufficiently clear what the sponsors are in fact taking off the table– a matter of disclosure.

The stated SEC drivers are to increase competition which will lower fees, and thus assist the investor cadre, which is appealingly described  as consisting of pension funds, school endowments, retiring people and those paying for college.  I  suppose that wealthy, non-retired, childless trading professionals also will be allowed to benefit from whatever investor benefits will be derived from this effort…..  🙂

Nor do I suggest that the bottom line goals of the SEC are misguided and, in this context, it is a bit difficult to understand Republican member resistance, which is actually framed in what seems a thin disguise of complaining that comment periods on new regulations are being expedited to shrink public comment periods from customary 60 days to 45 days or less; readers of public comments on pending SEC regulations, accessible to the public at SEC.gov., know that people with a real interest are prompt to post support or objections.  Surely lawyers for fund sponsors and managers are not going to miss an earlier comment deadline.

Supply Chain Impacts You Never Knew

With thanks to National Association of Corporate Directors–New England for this week’s  fabulous panel discussion with senior executives of General Motors, Boston Scientific and Dunkin’, here are some take-aways beyond an understanding that product disruption is being generated by various supply chain problems of both suppliers and intermediary freight services:

  1. Inflation may well be here to stay.  Increased prices driven by scarcity and increased delivery cost will not be surrendered by shippers or vendors later on; all this gets passed on to purchasers.
  2. Changes in the labor market due to COVID are permanent. The price of labor will remain high.  When we off-load all the stuff on the water, there will be a flood of more goods to be processed, sold etc.  This will make worse the labor shortage.  Furthermore, US birth rate is not sufficient to fuel future growth; we need to address the supply chain of labor.  Issue: immigration policy.
  3. Inflation in cost and thus price is no big deal to vendors because everyone is suffering, everyone will raise prices so market share will not be lost by charging more.
  4. “Just in time” buying has made markets efficient but that left no flexibility.  No excess production or delivery options.  Today purchasing models are different, inventories growing (“just in case”). We will return to just in time delivery in the supply chain BUT will likely be changes: perhaps a bit more inventory on hand, getting more suppliers of each item for flexibility, sourcing suppliers closer to home (“on-shoring”; less Asian reliance), design of components to be more easily duplicated/produced.  Counterpoint: inventory build-up is fundamentally inflationary as it increases price , and thus is heavy on management’s mind– at 10% increase in inventory at GM, vs “just in time,” cuts profit margins by the cost of money for $10 Billion of inventory maintained.  (“Supply chain is 70% of our {G&M] P&L.”)
  5. Everyone is focused on labor not just in terms of cost but also in terms of quality of performance; with wages increasing and mobility easier and with new models of working, everyone is working to ensure that key employees do not leave– ESG, DEI and pay factors related to managing supply chain issues now and adapting to changes in the future.  Question for board comp committees: do you reward the team or do you pick out your key players and build a comp plan based on specific performance of specific persons with specific measurable tasks?
  6. Chinese government COVID policy impacts supply chain and drives on-shoring because zero COVID tolerance=plants entirely shut down if any COVID=less supply being produced by definition.
  7. Some industries have shelf-life issues.  Dunkin’ supply chain and distribution chain deals with food-stuffs that spoil.  Boston Scientific deals with biologics.  Think about each business: some cannot tolerate much deterioration in “just in time.”
  8. Specific interesting issues: to cut costs of delivering  product, some companies will produce them nearer to markets.  In this regard, interestingly, GM has a shelf-life problem like Dunkin’ as its products have a shelf-life also by model year.  Boston Scientific is major world-wide supplier of certain products that have life-saving aspects, and they are attempting to recast supply and distribution chains because people can die if not done well.
  9.  Inventory levels will stay high for 2-3 years. Return to “normal” will be slow due to lack of flexibility in current systems.
  10. Everyone needs chips. Cars of course.  Boston Scientific of course.  Every business as they are working on AI solutions to supply chain issues which need devices which contain chips, etc.
  11. One corporate director on the panel noted that every business needs chips even when you do not think so; her companies make robotic cleaning devices all over the world; Tupperware makes kitchen gadgets.

SEC Acts: Insider Trading, Stock Buy-Backs

The activist SEC agenda has generated for comment two new rules designed to provide greater information to the marketplace; not surprisingly, providing information= more rules about what must be disclosed and even more forms to be filed.  As if public disclosure is not already overwhelming….

Insider trading by executives with early access to material facts was to be controlled by permitting trading safe harbor rules under Rule 10b5-1.  These plans were designed to make trades respond to mechanical triggers such as price or timing, divorced from exercise of investor discretion which could be unfairly informed by knowing what the market did not yet know.  In operation it became clear that the safe harbor was subject to clever gaming, including some now the subject of a proposed new rule (and some not…).

Specifically the rule, open for public comment would impact plans by: requiring a time delay between plan adoption and market trading; banning multiple trading overlapping plans; limiting single-trade plans to once each 12 months; requiring trading officers and directors to certify they in fact did not have any material nonpublic information at time of adoption  (in some instances, not such a great regulatory idea depending on the content of the plan itself).

Companies would be required to disclose: policies relating to insider trading as relates to option grants; any options granted within 14 days of release of non-pubic material information; changes in market price of securities for each of the day before and the day after release of information.

Stock buy-backs also are subject to a proposed new rule open for public comment.  Generally speaking, companies would be required to make prompt disclosures of repurchases, include buy-back reporting in periodic reports, and state reasons for the repurchase  (which presumably would NOT list  as a purpose “facilitating executive sale of company shares”).

For persons interested in learning more or commenting on the proposals, the SEC website can link you to the granular releases describing the rules (for example, the release for Rule 10b5-1[(33-11013] weights in at 163 pages) and the comment pages to record your view–no special qualifications or status are required to post your commentaries.

Spring-Loaded Stock Options

These are options granted to executives just prior to favorable announcements relating to the company which are likely to jump the market price above the strike price set forth in the options themselves; executives wake up one day soon to find themselves “in the money.”

It is not surprising that, last week, the SEC issued guidance requiring companies to make disclosure to the public of the facts surrounding the wholly anticipated increase in share price and the expected immediate added compensation value to the executive optionee.  Disclosure now should disclose this “additional value” accruing to the executive.

Express disclosure of this sort of course is not viewed favorably by investors, who likely find the practice a bit “fast” albeit not illegal.  (Whether proxy advisory firms find it problematical is another issue; surely these firms do fine-line math on compensation and thus are not unfamiliar with the arrangement.)  Certainly there is enough of a stigma to these options that the current SEC was motivated to seek disclosure in hopes of curtailing the practice, although history tells us that disclosure itself does not necessarily result in deterrence in the current environment.


The Human Capital Thing

It used to be “employee management,” and then “HR;” now with the Great Resignation, the shrinking of the labor force, the reshaping of “work” via pandemic, and the inflation of wages, it is re-named “human capital” and it has become a major business problem, disclosure issue and board of directors focus.

And the subject of a two-hour deep dive by a panel convened this morning by the New England Chapter of the National Association of Corporate Directors, at which BU Professor Charles Tharp coordinated a panel discussion with Independent Director Cynthia Egan, Eastern Bank President Quincy Miller, and Melisa Means of Pearl Meyer’s Boston consultancy.  Below, some important director take-aways:

There is little doubt but that the SEC will propose enhanced disclosure requirements; given the schedule for rule-making, it is likely that change will  become effective in 2023 after debate of drafts in 2022.  Emphasis will be on disclosing demographics, costs (salary and wages being a huge burner of corporate capital), DEI, succession and enterprise risk.

Disclosure also likely will track board work on strategy, now widely ongoing in many companies.  Will disclosure of strategy serve to inform competitors to detriment of the discloser?  The panel thought not, as strategy depends on skill of execution and depth of adherence to that strategy within the culture and ethos of a company; indeed, general disclosure of approaches ought to assist all companies.

Structurally many companies are remaking their organizational approach to human capital, given both the business imperative and the reputational risk of failing to address the growing corporate awareness of the perceived obligations of business to cohorts other than shareholders, e.g. customers and society.  Board Committees are being renamed from “HR” to capture the concept of human capital.  The predicate for success is whether an enterprise philosophically embraces this shift by empowering relevant committees in terms of resources, recognition when fixing corporate strategy, and evaluating entity risk.

How will companies deal with driving equity in the new workplace?  Classic approach is to key executive compensation to success, often effective but much depends on corporate culture and on finding a metric to which management compensation responds.  Some companies use management of human capital as part of a holistic checklist in evaluating and compensating management; larger companies often specifically key part of compensation (particularly bonuses) to demonstration of meeting identified targets.  Of these companies, 10%  weight (of executive comp)  typically has been given, although it was suggested that something like 20% is required to really attract management focus.  On the other hand, since this metric often only affects bonus and not base, it was noted that even at 20% the impact on total executive comp may not be huge.  Further, making progress in pay, sex and racial equity is a slow process, and such metrics should be placed in the longer-term corporate plan (as is done for example by Pru and Starbucks).

How do you measure success, to trigger rewards to management?  One measure is simple headcount of employee population, but that is not alone sufficient. With respect to employee compensation, there are two statistics: the “raw” number (women earn 74 cents to each dollar earned by men) or the “adjusted” number (looking at each department, as they have differing natural pay scales and turnover rates affecting seniority).  Eastern Bank also measures success by measuring employee engagement: charitable engagement, community engagement, turnover, number of calls to the ethics hotline.

Another heads-up for boards: add to the report on risk management an analysis of risk presented by human capital management: defections, inability to hire, shortage of staff, payroll cost increases to be competitive.

Finally there was discussion of dealing with remote workers, who are anticipated to be a constant even when the pandemic is wholly quashed. Seemingly the push for human contact is less powerful than had been assumed, and can be addressed by modest in-office attendance. Can there be equal promotion when people do not come to the office? And, it was noted that remote workers tend to over-work and suffer mental stress.  (I note that there are contrary view in terms of which employee cohort needs the most attention– those who commute have more expense, commuting time and stress, greater child-care an elder-care burdens….)











































































































































































































Tripadvisor: a Path to Success

Last Friday, C Level Community (a networking organization) sponsored a Waltham breakfast and interview with Stephen Kaufer, founder and president/CEO of Tripadvisor.  In the 22 years since its founding, Tripadvisor has grown into an international travel powerhouse, was acquired and later spun out again, and is a major force in US and European travel.  What’s Kaufer’s secret?

Kaufer notes that his company is an internet business and needs to act quickly to respond to the market.  Additionally, Tripadvisor has to maintain the independence and non-hackability of its posted reviews so that it remains an accurate guide to well-advised travel.

Although it feels gimmick-y, Kaufer claims that the enterprise has prospered by adhering to the messages on the three signs in his office:

“Speed wins.”  His market runs fast.  Put stuff up on the web.  If it doesn’t work, just take it down.

“Impact.”  Evaluate ideas not just if they will work but, if so, will they have material impact.

“If it’s worth doing, it’s worth measuring.”  How else do you know what works, particularly when you’re adhering the sign #1?

Interesting take-aways:

They must guard against fake travel reviews, and businesses puffing themselves.  Devices include using sophisticated web fraud investigators, gathering names of sites which overtly advertise that they will sell you good reviews (post them for you) by setting up mock hotels so that when good reviews come in, paid for by Tripadvisor pretending to be such a hotel, the fake reviewer organization can be tracked back and identified.

Second, what is Kaufer’s take on the revival of travel, post-COVID?  Leisure travel already has come back (people have felt locked indoors), travel in the US and Mexico has been robust and the US just relaxed border restrictions. 2021 summer travel was more robust than the same period in 2019.  Business travel will take 4-5 years to recover; conferences and marketing trips will be robust but certain kinds of business will continue to be done by zoom, such as periodic review meetings with customers.

Director Liability for Physical Catastrophe

We all know that over 340 people died on crashed 737s, that Boeing paid the DOJ $2.5 billion dollars for criminal conspiracy due to misrepresentations by employees to the FAA, that the chief pilot was indicted on criminal charges.  Now the Boeing directors have reached a proposed settlement of about $238 million to compensate pension funds which lost investment value in their Boeing holdings. (A court still needs to approve this settlement.)

The directors were accused of gross negligence and, indeed, willful breach of fiduciary duty in ignoring warnings about safety issues in the rush to get to market.  A settlement means directors will not be faced with a trial as to their alleged willful misconduct.

More interesting than the money (if anything can be more interesting than money) is the shopping list of corporate changes to which Boeing is agreeing: instituting missing reporting systems on safety and concerning what is told the FAA, adding a director with aircraft experience so there are more intelligent eyes on the company, establishing an ombudsperson for five years, guaranteeing that at least three directors have engineering or safety experience, splitting the offices of CEO and board chair.

There is no “takeaway” from this settlement relating to willfully ignoring safety concerns –you don’t need courts to inform directors about that — but there is learning here as to the standard of care which directors must bring to supervising companies which face the public and involve physical risks.  The ERM (enterprise risk management) function needs to have robust reporting systems that report to the board; boards cannot say they did not know what they could have known.  The duty to oversee, born in case law but little used for many years, now is front and center as to board governance.

Frontiers of Fraud

When you issue stock per a traditional underwritten prospectus, say an IPO, a purchaser has a right to sue if there is a material omission or misstatement.

Over the last few years, many companies have gone public by offering their shares directly to the public in what is called in the trade a “direct listing,” one advantage of which is that there is no underwriter in the deal insisting that existing stockholders refrain from selling their shares immediately.  SO– if you buy shares in a direct listing and the prospectus lies, you can also sue the company, right?

Wait– in an underwritten offering you know your seller: the company sold all the shares.  But in a direct listing, how to you know whom to sue?  Maybe the company did not sell the shares you bought.  Under SEC law, according to the requirement of “tracing,” you need to prove shares were issued pursuant to a registration statement or traceable to it.

The net result is of course unacceptable to have different outcomes, and by a 2-1 vote the Federal Ninth Circuit, known as an activist appellate jurisdiction, declared that the remedial purpose of the Securities Act of 1933 requires that the company be liable with respect to all shares in a direct listing without proving the identity of the seller.  This is the first such  judicial determination in a direct listing; it likely will be appealed, and is binding only on the Left Coast where the Ninth Circuit reigns.

Someone call a Congressperson quick…..

SEC and its Social Agenda

The SEC has just issued guidance requiring public companies to place on the agenda for shareholder meetings matters of general social importance even if they do not create material business impact on the registrant’s business.  This action is in furtherance of the concept that corporations have social responsibility that extends beyond shareholder investment returns.

While argument can be made, cogently, that in the long run investors get no return when the world collapses through global warming or through social protest, that range of thinking is not the typical purview of the SEC.  The new policy in effect reverses Trump regulation; now, the SEC will force onto the agenda “issues with a broad societal impact, such that they transcend the ordinary business of the company.”

It is not surprising that the two minority (Republican) members of the Commission objected to revision of contrary Trump era regulations, claiming that the SEC is erasing the prior SEC work with a “regulatory flavor-of-the-day” approach. That colorful characterization surely misses the point, since the Trump rules were themselves reflective of the Commission’s then-composition, and as SEC Chair Gensler noted in his related statement in support of the change, many members of the current staff “contributed” to the recent promulgation.

The disclosure trend can also be seen as consistent with the 2019 Business Roundtable Statement to the effect that corporations owe responsibilities to societal cohorts beyond the shareholders; this Statement was endorsed by very many companies including a large percentage of major US corporations.  Could the SEC action be seen as proof that one must be careful what one asks for?

In any event, the risk to management of ignoring for too long the strong wishes of shareholders is going to cause management to at last appear to embrace social values by placing such matters on the shareholder agenda and, thus, they will be forced in some manner to address those matters substantively.  Will major institutional shareholders also be forced by their constituents to push these agenda items on the companies in which they own shares?