Boston Olympics? More than Meets the Eye

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Suffolk Construction CEO John Fish leads the committee exploring bringing the 2024 Summer Olympic Games to Boston. His reasons, however, are likely not what you expected.

Delivering remarks at the National Association of Corporate Directors/New England September 18th breakfast meeting, Fish emphasized that attempting to attract the Olympics was not just about the Olympics. Although I am sure that he would consider Olympics Games in Greater Boston to be a lot of fun (he never actually said as much), his foci were directed elsewhere.

First, he noted that the development of a robust infrastructure to support the movement, housing, feeding and care of an expanding workforce, regardless of whether the Olympics come to Boston, was a necessary component of robust economic growth. The Olympics could feed into the build-out of that infrastructure, by creating sustainable space which could be utilized as part of that future infrastructure. He sees the Olympics as getting a head start on future development.

Second, in developing Boston’s Olympics proposal, the committee convened many experts in data analysis. What events would be held in which venues and at what time? Where should the housing and support functions be located? What will be the impact on participants and the general population in different locations for pedestrians, drivers, workers, people seeking food or other services? The committee has developed a computerized model to analyze data for all locations relevant to the Olympic Games, and to do so hour by hour. For example [which I am suggesting, this was not made express at the meeting], let us assume there is a hockey game at the Harvard Hockey Arena on a Thursday. Should that be held at 10:00 in the morning, 2:00 in the afternoon or 8:00 at night? What will be most crowded, least crowded, most supported, least intrusive on the different constituencies and how do you address those issues by planning?

Fish cannot say whether Boston will receive the United States recommendation, and thereafter the International Olympic Committee approval, but he hopes that the information-based tools they have developed can be utilized in the future for planning infrastructure build-out.

A week or two ago, the Globe printed a map of Greater Boston with an indication of how the Olympics might fit into existing facilities, and into newly built facilities which could be repurposed after the Games concluded. I recall, at the time, not understanding the logic of how locations were being assigned; having heard Fish speak with respect to the data-driven methodology behind the plan, the logic of the proposal now becomes clear.

Business in China: How to?

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Economic growth in China may have slowed, but it has slowed to an annual rate which for the foreseeable future, claims GE Chairman Jeff Immelt, will be between 7% and 8%. I note that this is more robust than predicted growth in other developed economies. Consequently, China should be on one’s mind.

Immelt and the rest of his panel (Suffolk Construction CEO John Fish and Simmons Business School Dean Cathy Minehan) discussed China at the September 18th meeting of the National Association of Corporate Directors/New England, before approximately 200 corporate directors and business leaders. Herewith some of the major take-aways with respect to China:

The best people in China are in government, not industry. They are well-educated with world views. While certain reforms are necessary, there remain some impediments to those reforms. The central government has been centralizing power of late (not necessarily a favorable development), in light of corruption and suspicions with respect to party loyalty. One must be careful in doing business with China.

It is necessary to appreciate the vantage point of the Chinese government, according to Immelt. Their constant primary concern is: how do I house and feed 1.3 billion people? A business plan that is part of that solution will succeed.

So China will be a growth market but there will be risks. You can’t approach China just as a market; they want business to build things within China. This recognizes that one manufacturing job does not create just one manufacturing job; people working in the supply chain may bear an 8-to-1 ratio to the actual number of workers in a given factory.

GE does not “bet the ranch in China,” Immelt stated. He follows events in the country closely, and every single decision with respect to business in China, on the part of GE, is made by him personally.

A bit sobering, I think.

White Collar Labor: pass me the hammer…..

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Future manufacturing and construction jobs in the United States should not be viewed as blue collar jobs but rather as white collar jobs.

The September 18th panel convened by the National Association of Corporate Directors/New England (consisting of GE Chairman Jeffrey Immelt, Suffolk Construction CEO John Fish and Simmons Business School Dean Cathy Minehan) spent a lot of time discussing the role of technology in the economy. Technology was seen as the key to economic expansion.

Fish noted that construction was now viewed by him as a “white collar” industry, in that his company was “doing more with fewer people,” and while we needed more seats in vocational schools and we needed companies to take a lead in worker training, the application of technology to construction was changing the nature of the workforce he required.

Immelt was even more emphatic. All industrial companies either are now or soon will be reliant on software and analytics. He used as an example the jet engines built by GE. By measuring robust real-time data concerning how a jet engine was running, its wear and tear, its use of oil and fuel, and its overall performance, and by injecting that broad data back into the manufacturing process, the manufacture of jet engines would improve, over time, establishing a competitive edge.

There was also discussion of the use of technology as solving growing problems; for example, worldwide pollution, something which will become a central planning issue for China (suffering from pollution which must be mitigated by the government). Technology is addressing global warming through new developments in solar and other alternate power, and electric vehicles. Additionally, technology is addressing the shortage of water, a major need for the growth of industry as 70% of the world’s land mass does not have an adequate supply (even before you get to the need for water in fracking).

The ages of the panel members might make you expect that they would not be particularly attuned to technology as a key element in business growth. Nothing could be further from the truth. Job growth and competitive advantage, and the re-establishment of the United States middle class through creation of well-paid technologically oriented jobs, were all related by the panel to further technological innovation.

Experts, including GE CEO Immelt, Analyze Economy

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The near term prospect for United States business is on the uptick. Our recovery from the recession is steady, although it is subject to months where statistics appear counter-cyclical. The United States is faring better than most developed economies, and the time to start business initiatives is today. You shouldn’t wait around; the way things look today constitutes the “new normal.”

This is the view of the panel at the September 18th meeting of the National Association of Corporate Directors/New England.  Panel members were Jeffrey Immelt (CEO of General Electric), John Fish (CEO of Suffolk Construction and head of the committee to bring the 2024 Summer Olympics to Boston) and Cathy Minehan (Dean of the Simmons School of Management and former President of the Boston Federal Reserve Bank).

According to Immelt, there are still problems which the United States economy should overcome, particularly paucity of investment for small and mid-size businesses, which are the drivers of employment growth. We also need to work on training and education, protecting small businesses (we say we love them but “crush them”), infrastructure and regulatory reform.

The panel also cited the complex and over-reaching United States corporate tax system. This has led to “inversion” transactions, where American companies re-establish their home base outside of the United States to save on taxes (Immelt noted that “We’re not doing that.”). There was, however, a lack of confidence that the political deadlock would permit addressing the tax code any time soon.

One of the drivers of American manufacturing, which Immelt claims is in its best shape in thirty years, is inexpensive energy compared to our worldwide competitors.

Minehan noted that while the United States is indeed on an “upward trajectory,” one great help would be a “normalization of interest rates,” particularly in the short term; we should not be concerned with month-to-month volatility. She also noted that the United States was benefitted by our ability to attract, educate and retain young people from other countries (“thank God for immigration”), which makes the United States more resistant to an aging demographic than other developed economies. China was going to run into a problem of an aging workforce as a fallout of its “one child per family” policy.

The panel noted that we were not training people to do the jobs we need, and that we lack the technical schools to train an intelligent workforce. Education is too expensive, and there is unsustainable student debt. Industry must take a lead, also, perhaps in summer internship and apprenticeship programs.

Failure of the government to cooperate with industry to understand the growing needs for infrastructure, including roads and transportation, will stifle growth and already is causing gridlock in a variety of ways. For Massachusetts, attracting people from overseas and inducing them to work in Massachusetts outside Route 128, attracted by new infrastructure support in the rest of the State, would be a great way to build the economy and to provide affordable housing.

The panel agreed that under-employment was not just an American problem. Immelt noted that under-employment is the global issue, and that for example over 60% of Egyptian college graduates were unemployed.

In subsequent posts, I will address three additional areas discussed by the panel: the role of technology; doing business with China; and, the effort to attract the Olympics to Boston.

Sox it to me….

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I don’t know about your email box, but I am flooded by emails from baseball fans near and far, driven by a press frenzy and (surprisingly) arriving from such baseball outposts as Chicago and Washington, relative to what the Red Sox ought to be doing when they rebuild.

For starters, the outfield seems over-staffed yet complicated. Jackie Bradley has been unable to hit the big league slider. He is a kid; he should be sent down to Triple A to see if he can work on his fundamentals.

This still leaves a plethora of outfielders: Cespedes who seems to be lionized even though he is hitting below .260, the newly signed Cuban Castillo (who never played a major league game until last night but landed a $72,500,000 long term contract), the allegedly much-feared Allen Craig (who is hitting around .200 and can’t seem to find his footing), last year’s star Shane Victorino (who I think has played fewer games than my grandmother this year by reason of injury, and appears to be continually fragile), and then Mookie Betts (a surprise 21 year old with attitude and skill).

Throw into the mix Daniel Nava who had a fabulous year in 2013 and this year is languishing (like many of the Sox) around the .260 mark with 4 home runs in over 300 at bats. And he can’t run. Where does he fit in?

Ellsbury is having a lousy year with the Yankees. Would he have done better here? One wonders. Then again, he is surely not worth the salary the Yankees are paying him, and he is still on the early side of his tenure with the Yankees. I love the guy, but perhaps it was a good move to let him go?

The Sox have weaknesses in pitching. Who will they have to trade to get pitching, if they don’t want to give away any of the “kids?” If you protect Betts, how much outfield playing time could you give Craig (who has no trade value)? You are not going to blow out Castillo, nor Cespedes. Betts likely has huge trade value, but for that reason do you let him go? If you let Betts go, aside from Cespedes your outfield looks like unproven Castillo, unperforming Craig and crippled Victorino, into which salad you would shake Bradley if he develops down in Pawtucket and then Nava.

Is common wisdom correct, that we need big-time starters? One of my correspondents claims that the Orioles, who have opened a huge lead in the American League race, and just clinched the Division, don’t have a “stud starter.” Could Buchholz and Kelly jointly fill a semi-stud top-of-rotation role?  (Last night’s shelling of Buchholz surely cannot be reassuring.)  Blend in some of the kids (Webster, Rubby, Wright)? Mujica and the rest of the committee as closers (Koji is likely toast). Is that enough? Given the price of seats, does management have the nerve to leave the pitching staff right where it is today, bearing in mind that the team is struggling to win 70 games? An interesting question.

So what is with the infield? Napoli has some power but not a lot of RBIs and has been spotty. (He has a high OBP and likely is misused hitting later in the line-up but he projects as a power hitter so he hits where the power guys hit.)  Middlebrooks, whom the Sox seem to love because of his alleged power, has been a total disaster for the entire year. How much playing time do you give him at third base? Everyone keeps talking about Holt as a backup but I see him as a third baseman. Bogaerts seems coming around as a shortstop and I don’t think anyone will move his position again, nor trade him. Do you give Craig a shot at first base? Platoon him with Napoli, and use either or both of them to spell Big Papi in the DH role?

This is not the first time Big Papi has had a weak year. A weak year punctuated by 32 home runs I might add; will he come back in terms of batting average? Is this the beginning of the end for Big Papi?

Another way to slice the pie is to say that Cespedes can become the next Big Papi. He has never hit for the average that Big Papi has achieved in many years; can he be trained to be sufficiently patient at the plate to do that? Does he care to do that in any event? He becomes a free agent at the end of 2015 I think. If he continues to play the way he is playing, and doesn’t conform to Red Sox needs, maybe he doesn’t care because he goes elsewhere as a position player, without changing his act, for the big bucks.

That brings us to our little second baseman, Dustin Pedroia. In each of the last several years he has had noticeable decline. He is at this moment being operated on for a hand injury and is gone for the rest of this year, but then there isn’t much of this year left. What will he be like on his return?  Sox management on today’s team web-page assures us that after surgery he and his power will return; sounds like the old joke (“Doctor doctor will I be able to play the piano after my surgery,” to which the doctor replies in the affirmative and the patient says “great, because I don’t know how to play now and I always wanted ….”).  It is premature to suggest that Pedroia, everyone’s darling and the player with the attitude you wish everyone had, former Rookie of the Year, former .300 hitter, might be fading to average-ness at this early age. But he is small, he plays all out, he punishes his body in every game and in every role. How long can he last? You know the book on small ballplayers, don’t you? They burn brightly and then all of a sudden, the flame goes out.

So maybe if the Sox are married to Middlebrooks he is at third, Bogaerts at short, Pedroia at second, Craig/Napoli at first, and Holt is the floater. (We will put aside the fact that Holt has a higher batting average than all the rest of these guys, and, in fact, just about a higher batting than a couple of them combined.)

Oh, one more thought; Mookie Betts was a second baseman in Pawtucket and the Sox are now trying him out at that position. Does that mean we are now short of proven outfielders and long on proven infielders?

Back to pitching one more time. Everyone keeps telling me that Jon Lester will come back. Is there anyone out there willing to bet on that? I have $10 that says that Lester will not be back in a Sox uniform next year. Anyone want the bet? Lester’s return has become something of urban legend. But the Sox don’t give long contracts to aging players, and Lester is going to bring down a long-term fortune next year given his studly performance so far at Oakland.

I see Lester next year in pinstripes. Eat your heart out.

Alibaba: less than forty thieves??

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We await the much-heralded IPO of Alibaba, the Chinese on-line retailer that is larger than — I read this somewhere, what was it, larger by sales than the economy of Europe and the US combined??– no that cannot be right….  In any event, its BIG.  And as a stock–  HOT.

Comes along Professor Lucian Bebchuk of Harvard Law School, leader of the movement for shareholder rights and director of the Harvard program on corporate governance, and writes in the New York Times yesterday a warning to investors:  keep your eyes open to “the serious governance risks accompanying an Alibaba investment.”

Bebchuk notes there is great governance risk; a small group of insiders owns a small amount of equity but has guaranteed control.  This same group owns lots of equity in companies that do business with Alibaba and could thus divert profit from Alibaba to these other entities. 

Bebchuk got this information from a very public source: the registration statement disclosures filed with the SEC and given in the Prospectus to all would-be investors. Since investors are thus duly warned by robust disclosure, it is strange that Bebchuk would in effect restate the risk as a warning in a column. 

Investors receiving full disclosure can make their own decisions.  If they find that profits are not sufficiently robust, they sell the stock.  Concentrated control, and the opportunity to use that concentration for personal gain, are risks presented by very many companies in the marketplace.  Directors, even if named by an insider cabal, still owe fiduciary duties to the other shareholders.  Just seems strange to me– anyone else react that way?

Banning Noncomps in Massachusetts?

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The current law in Massachusetts concerning enforcement of noncomps is based upon court cases and not on statute, is confusing and very fact dependent as to which noncompetition covenants will be enforced, and is a constant matter of legal dispute for med-tech companies (and, indeed, for many other companies also).

At a September 16th meeting of MassMEDIC (the association of Massachusetts medical device companies), I had an opportunity to present upon the current status of Massachusetts law concerning noncompetition agreements, which has become an area of great interest since earlier this year, when Governor Patrick proposed a statute which would render all noncompetition agreements unenforceable, except in cases of business acquisitions. His theory was that the elimination of noncompetition agreements would make executives and scientists in technology fields more mobile, thereby driving the Massachusetts economy and encouraging entrepreneurship. Think California (a State which does in fact ban noncompetition agreements).

Three different proposals surfaced in the Massachusetts legislature during the session ended July 31st. None were adopted and they all died. The one that came closest, approved by the Senate but not the House, would have permitted enforcement of some but not all noncompetition agreements. That proposed statute required notice to the employee of right to counsel, gave employees five business days advance notice before being required to sign, required fair consideration to the employee in addition to continued employment, had a ten day cooling off period before the agreement became effective, presumed reasonableness of time for restriction periods of six months or less (the implication being that longer noncompetition covenants would be closely scrutinized), limited the geographic prohibition to areas in which the employee worked (not where the company operated), and could not be imposed upon hourly employees.

After the close of the formal legislative session, and during the informal legislative hiatus period in which we now find ourselves, Governor Patrick refiled legislation in the form of a request that Massachusetts adopt the Uniform Trade Secret Act which, similar to the Bill described above which was passed by the Senate but not the House, would permit noncompetition agreements in limited circumstances.

Prospects for passage of any legislation in the next formal session are unclear. Some of the larger technology companies in the Commonwealth, protecting their work force, are opposed to any such legislation. Not surprisingly, the entrepreneurial community is in favor. Perhaps in the coming gubernatorial campaign, some light will be shed on the issue and perhaps one of the candidates will pick up the cudgel and drive for statutory reform.

Labor Protest Today in Boston– Supersize my Paycheck

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Out for my usual luncheon stroll around town in today’s picture perfect weather, I was attracted to a noisy gathering, surrounded by flashing blue police lights, at the intersection of State and Congress Streets, in the heart of Boston’s downtown business district.  About a hundred very noisy protesters with bull-horns and cryptic signs were chanting that they wanted $15 an hour plus a union.

It was impossible to tell what industry they worked in, however.  They were organized enough to get into place all of their people, placards, bull-horns, banners, and a line of ten protesters prepared to be arrested by sitting across the traffic lanes; apparently, however, no one of the protesters thought to make it clear to the curious business lunch crowd who they were.

So I crossed the police line, drawing modest interest, and just asked.

They are the fast food workers.  All different fast food companies.  They want equality in wages (with whom they did not seem to know).  They want it NOW.  If they do not get it NOW, they will, seemingly per their chants, stay IN YOUR FACE until they get it.  They are much like the Terminator, it seems to me: they say that they will never be defeated and that they will not stop.

Now $15 an hour these days seems like not a lot of money, and I do not in fact begrudge them this modest stipend;  the press is full of stories of marginal workers who are below the poverty level although they do hold down jobs– at least these folks are trying.  My first law job worked out to about $3 an hour, I recall — but that was long ago, when men were men, a dollar was a dollar, and a Red Sox bleacher seat was a quarter.

It is a bit of an anomaly, perhaps, that the impact of a raise like this is likely to disproportionately affect the poorer populations, as the cost of fast food may well rise and as the target client base of fast food is not exactly the James Beard crowd.  But who knows how much this raise would really cut into profits, and how much the franchisees are earning; maybe the math just works out more or less.

A few details of note: protesters of all ages and colors; the Boston police were very controlled and gentle, easing the arrested sit-ins off the street with a few words and escorting them uncuffed to the paddy wagons (very reassuring and I think ACLU-friendly); the protest (for those of you unfamiliar with Boston history and lore) was just in front of the Old State House, built in 1713, site of the 1770 Boston Massacre in which the Redcoats shot and killed five protesters (it was about taxes in those days), and site of the headquarters of the British occupation of Boston during the Revolution.   My family goes there many July 4ths to hear the Declaration of Independence read from the balcony — pretty good piece of polemic writing, that Declaration. 

Come to think of it, today’s labor protesters could have taken a lesson in clarity of message from that Declaration. 

 

The Public Benefit Corporation

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 Let us say you are a company that wants to make a profit, but wants to consider not only the interests of the shareholders, returning some profit to them, but also the interests of other groups you characterize as “stakeholders”: employees; the public at large; the environment; the general economy. In the context of the American corporation now conceived as a machine designed to return profit to shareholders, how do you establish such a corporation without having the officers and directors breach their fiduciary duties by making decisions which reduce profit in order to benefit some other constituency?

About a year ago, the state of Delaware established a new concept for a corporate entity. In effect, by statute, it has expressly permitted rejection of the now-ingrained corporate focus on shareholder return. While it is perhaps not surprising that Delaware, our most imaginative of corporate jurisdictions, has developed this option, it is also mildly anomalous; after all, one of the fountain-heads of the current understanding of the corporation ( run by fiduciaries for the benefit of the risk-taking shareholders) is Delaware, home of so many of our larger or public for-profit corporations.

You can establish a public-benefit corporation in Delaware by simply so providing. There is an infinite range of interests that can be benefitted by a public-benefit corporation, in addition to the stockholders. The corporate formation papers must specifically identify one or more categories of stakeholders, other than stockholders, within a very wide variety of possible beneficiaries: the list includes but is not limited to the following constituencies: artists, charities, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological.

In lieu of including the cumbersome words “public-benefit corporation” in the legal entity name, you may use the abbreviation “PBC.”

Further, an existing for-profit corporation can amend its charter to become a PBC. The requirement is of a 90% vote of each class of stock.  Of course, that can leave as many as 10% of the shareholders, who signed onto a for-profit corporation, suddenly facing a fundamental change in the nature of their investment. Consistent with general Delaware and corporate practice, a shareholder so negatively affected economically by a change in his or her investment, to which such shareholders did not consent, is entitled to statutory “appraisal” (a mandatory redemption of stock at fair value), rather than requiring a shareholder to be dragged unwillingly into a public-benefit corporation.

Interestingly, it requires only a two-thirds vote of outstanding shares to go the other way, which is to say to take a public-benefit corporation and flip it back into a for-profit corporation. No right of appraisal is afforded in such instance, because although the nature of the shareholder’s investment is being radically altered, that alteration presumably is deemed not to create an economic disadvantage.

There is an express provision which requires the board of directors to manage the affairs of the public-benefit corporation to reflect the interests of the various constituencies specified in the charter, and provides protection from director liability  (shareholders cannot sue directors for taking action which they honestly believe to be in the best interest of the stakeholders specifically identified as benefitted by the PBC).

So, does Market Basket pressage a revised sensibility to the proper role of a corporation? Or is it a “one-off,” an oddity wherein a shareholder dispute triggered an unusual reaction? I note that no one has suggested that if “Arthur T” gains control and is reinstated (as was announced today), he will opt for a PBC approach, notwithstanding the incredible support he has received from employees and consumers;  there seems to be a private equity firm backing him, as well as a load of new corporate debt, and I doubt that many PE firms or creditors would have an interest in the PBC model for Market Basket just now….

The SEC, IRS and Shareholder Activism as Handmaidens of the New Corporation

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 In the prior post, we tracked broadly the treatment of American corporations as economic institutions driven by increases in shareholder value. Boards of directors and CEOs are now being held to building shareholder wealth as their mission.

This second post broadly outlines three ways in which our government agencies, and emerging corporate practice, have bought into this concept.

The SECs disclosure scheme, particularly the mandatory discussion of compensation in annual filings, feeds into analyzing corporations only in terms of their earnings, and evaluating the CEOs in that fashion. The granularity of financial reporting under the SEC’s mandatory XBRL regime, while clearly improving corporate financial reporting, also lends itself to the kinds of calculations and valuations, and consequently the judgments and rankings, of corporate performance based upon easily quantifiable and comparable earnings data.

The current Internal Revenue Code denies public employers a deduction for the salary of the principal executive above $1,000,000 per year, except to the extent that excess compensation is tied to “performance”. Performance is most conveniently and objectively measured through profitability and earnings per share. Since short-term executive compensation often is tied to aspects of such performance, economic goals have become the focus of management. (Recently, compensation advisors have been suggesting an approach that rewards both short-term and long-term shareholder benefits, but the focus has still remained on total shareholder returns as the measuring stick.)

Similarly, the rise of shareholder activism, facilitated by changes in the law and in internal governance practices which eliminate insulation of boards from shareholder pressure, have made corporations more responsive to shareholder interests, and have thus created a system where directors and management cannot protect themselves from the mantra of maximizing shareholder returns.

Although Market Basket is a private company and not wholly analogous to the larger public companies which primarily concern the SEC and the IRS, we can measure how far down the line we have come in buying into shareholder focus as the touch-stone of corporate performance when we measure our own shock, and perhaps negative reaction, to the action of low-level Market Basket employees and local shoppers.

In the past, if an entity wanted to benefit public constituencies, it would form itself as a non-profit enterprise. By definition, the economic power and sustainability of non-profit enterprises is limited. In our third and final post on this subject, we will discuss the possibilities presented by a new form of entity, the “public-benefit corporation.”