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How to Win the War in Iraq

What do you do When you find out you are wrong? Not just wrong about one thing, or a little bit wrong. What do you do when you find out you are very wrong, and consistently wrong, and there are really big consequences? President Bush, after three years, seems to finally realize he has been wrong. Well, not really. But he has finally acknowledged the big consequences part. Part of the problem has been that he has only gotten advice from those willing to tell him what he wants to hear. So the formation of the Iraq Study Group was a good thing, right? Finally, some independent experts would weight in, and tell the President some things he wouldn't like to hear. Except they weren't really experts. And their advice has little to do with Iraq. And Bush isn't really listening anyway. So how do we win the war in Iraq? Maybe, just maybe, it wouldn't hurt to ask the real experts - the military people actually in Iraq. In fact, one of our troops has given us a PowerPoint presentation. That's right, it's even in the preferred format of upper management everywhere. Seriously, go there right now and watch the presentation, it's only 18 slides. It's a revelation. Not because this one soldier, Capt. Travis Patriquin, is a military genius, or that his ideas are a silver bullet that will magically solve all problems. It's amazing because Patriquin's presentation actually talks about the reality on the ground. He presents actual ideas, grounded in reality, that could actually be tried. This is a amazing. Think about it - this administration has spent years propping up non-ideas (like staying the course) as if they were ideas. They have spent more time and effort denying reality than dealing with it. I had almost forgotten what ideas taste like. It has been so long. Unfortunately, this presentation is the last insight we will get from Capt. Patriquin. He was killed last week. His "How to Win the War in Al Anbar" may go down in history as the first PowerPoint presentation to make a positive change in the world. Or maybe it will be ignored. Past performance is no guarantee of future results, but based on 6 years of the Bush administration, my guess is it will be the latter. You know what this reminds me of? This reminds me of every large company or organization I've ever worked for or dealt with. The people at the top are so disconnected from the people at the bottom that they begin to congratulate themselves for the disconnect. "I don't need to know how widget X works, in fact I shouldn't know at all. I need to think about strategic business decisions." We don't want to waste the chief executive's time with tactics, he has strategy to strategize about. We can lay off engineers, they just have domain knowledge, they don't contribute to the bottom line like sales. We need programmers with 5 years of Java and J2EE, don't worry about anything else, it's just business logic. We can outsource our call centers to India or Kansas or where ever - all they need is a script to work from, hire a consultant to develop the script. We need professional project managers, certified experts in the art of scheduling and tracking--they don't have to understand the project they're managing, what are you daft? Tactics matter. Actual information that reflects reality matters. They say it's not what you know, but who you know. That might be true in job hunting and getting political appointments, but apparently it doesn't win wars.

Phantom Stocks and Dividends: Executive Deception

People love to bemoan the supposed excess of corporate executives, especially in the wake of the major corporate scandals that have been front page news for the last few years. People say that executives are obese pigs feeding from the corporate trough, reincarnations of decadent Roman emperors gorging themselves on rampant profit, big-bellied Nash caricatures come to life, etc. Well, nobody actually says those things in those words, but that is the general sentiment. All things being equal, executive pay is the product of market forces and it is hard to argue with what the market is wiling to bear. Weak compensation committees on boards of directors may indirectly contribute, but that is the concern of the shareholders who elect board members, not John Q. Public. But all things are not equal and executives can and do use guile and omission to enrich themselves in ways that deceive the very shareholders they are supposed to be ultimately working for. Here is one such deceit.

Many corporate executives are paid partially in stock options. This, theoretically, aligns the incentives of the executive with the incentives of the corporation as a whole and its shareholders. The better the company does, the higher its stock price will rise, and the more money the executive can cash in his options for. For example, say Company ABC's stock price is $20 per share. An executive is issued 10,000 stock options priced at $20 per share as part of his annual compensation, optionable in three years time. At the end of those three years, ABC's stock price has risen to $30 per share. If the executive chooses to cash in his options, he effectively pays $20 to receive $30, a $10 profit. In this scenario, the executive makes $100,000 (10,000 options multiplied by the $10 increase over the option price). This is very simple stuff.

Sometimes, the options are issued not with a time constraint, like three years, but with a performance or market constraint. This means the options are not optionable unless some sort of performance or market outcome is reached. (and it also means these aren't strictly options, but they do have the same characteristic of only being worth anything under specific conditions). This ties the executive's pay directly to some specified goal. These are sometimes known as phantom stocks, because they don't really "exist" until the goal is met. If the goal is never met, then the executive never receives the stocks at all and gets nothing for that portion of his compensation.

But, crafty executives and rubber stamp boards of directors have found a way to ruin even this very specific incentivized compensation by creating phantom stocks that pay dividends regardless of whether the executive ever meets his goals. In some cases, phantom stocks paid out over $200,000 in dividends every year, completing defeating the original purpose of using phantom stocks.

Next time you are thinking of investing in a specific company, take the time to check out the company's yearly proxy statement, available for free on the SEC's website. Under new SEC regulations, the disclosure requirements for executive compensation have been expanded and particularized, making it easier for the average person to read and understand the convoluted structure of executive pay and making it harder for deceitful executives to hide the true nature and extent of their compensation packages.

Response to Whether “CEOs are Inherently Sociopathic”

Jason wrote an interesting post about whether the denizens of Slashdot were correct in claiming that CEOs are inherenly sociopathic. While it is tempting to label CEOs sociopaths because the nature of their job supposedly rewards lacking empathy and nobody likes the wealthy and powerful, they are not and here is why. A corporate executive has a fiduciary duty to the corporation’s shareholders. That means they need to think about growing the company and creating a profit so that shareholders make money. It also means they have to exercise due care and diligence, amongst other things, in their handling of corporate affairs and to refrain from committing any legal or ethical violations. To condemn CEOs for doing their jobs is to condemn the entire corporate system, which is held together by the trust that various people must place in others within the entity. This mutlifaceted trust is encapsulated by and embodied through the fiduciary relationship, which imbues all forms of legal agency. Keep this fiduciary duty in mind while looking at the DSM-IV factors for Antisocial Personality Disorder (which is grouped with general sociopathy in the DSM). Critically analyzing the nature of the executive position vis-a-vis these factors reveals that the fiduciary duty, the very defining duty of an executive, actually inhibits sociopathic behavior, rather than encouraging it or even tolerating it. Here are the seven factors: (1) Failure to conform to social norms with respect to lawful behaviors as indicated by repeatedly performing acts that are grounds for arrest. Lawful behavior for a CEO would be to conform to the various specific duties imposed by the general fiduciary duty he or she owes to the shareholders. (2) Deceitfulness, as indicated by repeated lying, use of aliases, or conning others for personal profit or pleasure. Deceitfulness and lying for personal profit would be clear violation of the fiduciary duty (and violations of many other laws). (3) Impulsivity or failure to plan ahead. This would be a potential violation of the fiduciary duty of dilligence and care, although not in all cases. But even when the actions are ambiguous enough that it is uncertain if there is a violation, they would still be actions that harm, rather than benefit, the company. CEOs are generally not interested in harming their own company and if they were, the shareholders, acting through the board of directors, would remove the offending CEO. (4) Irritability and aggressiveness, as indicated by repeated physical fights or assaults. I don’t find that this is often a concern with CEOs. I am sure many CEOs are annoying to be around, but they don't normally commit assaults or get into fights (paper-based white collar crimes are more their style). (5) Reckless disregard for safety of self or others. See the response to factor 4. (6) Consistent irresponsibility, as indicated by repeated failure to sustain consistent work behavior or honor financial obligations. Not honoring financial obligations is a violation of the fiduciary duty and mroe importantly is what leads companies to ruin and offers them up to hostile raiders or voracious creditors. (7) Lack of remorse, as indicated by being indifferent to or rationalizing having hurt, mistreated, or stolen from another. This is the only factor that has legs. While I cannot attest personally to the level of remorse the average CEO has, it is easily within the realm of reasonability that they are more likely to lack remorse. Ultimately, only one factor would be met by the “ideal� CEO who obeys the laws governing his or her office, hardly enough to posit that many CEOs are sociopaths. In fact, the fiduciary duty directs CEOs to avoid the behaviors listed above. The very nature of being a CEO is not sociopathic. If a CEO consistently violates that duty and his actions mesh with the factors above, then it may be appropriate to label him a sociopath, but that would constitute a deviation from what is considered to be appropriate and legal. Politicians on the other hand, they are inherently evil.