CNN IN THE MONEY
The Impact of North Korea's Nuclear Threats; Baby Boomer Retirement; Harley Davidson Turns 100
Aired August 30, 2003 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Welcome to the program. I'm Jack Cafferty.
Coming up on today's edition of IN THE MONEY, damage control. The U.S. meets face to face with North Korea and four of its neighbors to talk about North Korea's nuclear program. We'll find out why the outcome matters for countries that want a bomb of their own.
And bye-bye Boomers. We'll look at a report that says the Baby Boom generation could save America's job market by taking a hike.
And that mean teen: green teenagers change their mind almost as often as they change their clothes and that means trouble for retailers. But we're going to show you some firms that have this all figured out and deliver on the teenage goods.
Joining me on today's program, as always, CNN correspondent Susan Lisovicz and "Fortune" magazine senior writer Sean Tully, who is in for Andy Serwer, who gets entirely too much time off from the program.
We get some increasingly strong signs that this economic recovery they're talking about for the second half maybe be second knocking at the doors. Is it the real deal, do you think?
SUSAN LISOVICZ, CNN CORRESPONDENT: We got a lot of great, encouraging news this week, GDP, jobless. All of that was good.
But you know what I was most interested in is that ad spending in the United States climbed nearly seven percent in the first half of the year. That's something all of us can understand. When companies spend more money on marketing their goods, they think consumers are going to spend
CAFFERTY: That's a good point.
LISOVICZ: If consumers spend, then they hire. And that is really encouraging.
CAFFERTY: We got a much better than expected consumer spending number on Friday, indicating that maybe, as you say, they believe it's the real deal and some of that tax cut money is making its way through the pipeline.
LISOVICZ: There's still jobs. CAFFERTY: It's always a lagging development.
SEAN TULLY, "FORTUNE" MAGAZINE: Yes. This is the first time we've had a lot of indicators all pointing in the same direction in a long time. Previously, a lot of the signs were very, very mixed. So this is the best news we've had in a while.
Of course, the stock market reacted pretty strongly and has hit new highs. The NASDAQ is back over 1800, getting ahead of itself, Jack. I think that we were getting back into tech bubble territory.
CAFFERTY: I was going to say. They're buying the same stuff that they got massacred with by owning it the last time around, right? They're buying the same...
LISOVICZ: It's hard to believe that people didn't learn their lesson.
CAFFERTY: Right back at the trough. Get me some more of that.
All right. More on that as we move through the hour.
In other developments, the United States and four of North Korea's neighbors sat down in Pyongyang (sic) this week to talk about North Korea's nuclear weapons and what they may or may not do with them at some point.
On Thursday North Korean officials shocked the gathering by saying they plan to declare themselves a nuclear power and might even test an atomic weapon to prove it.
Some of the countries with the biggest stake in these talks in Beijing weren't even at the table. They were watching from the sidelines and thinking about nuclear arsenals of their own.
For more on all of this, we turn now to Henry Sokolski in Washington D.C., the director of the Non-Proliferation Education Policy Center, which promotes better understanding of the spread of nuclear arms.
Henry, nice to have you with us. Thanks for joining us.
HENRY SOKOLSKI, NON-PROLIFERATION EDUCATION POLICY CENTER: Thanks for having me.
CAFFERTY: One of the American diplomats said on the first day of these talks that if they got to the end of the three days and North Korea hadn't walked out, they'd consider the talks a resounding success. I guess North Korea stayed around for the whole three days.
What's your take on what happened there and how seriously we should take this dialogue, this rhetoric, if you will, coming out of North Korea?
SOKOLSKI: We were threatened and we were insulted, and if we think that's a success, there are a number of playgrounds in the local area I can send our diplomats to learn some common sense about how you're supposed to behave in these situations.
CAFFERTY: But realistically, I mean this is nothing new for North Korea to be bellicose and argumentative and rude and nasty. I mean, that's what they do over there.
SOKOLSKI: It was a bit more specific, though. They threatened to do a nuclear test.
Now, we can wait until there is a test. I wouldn't. Or we should go to the U.N. Security Council and say that we're seized with this, and make it very clear what will happen in advance if they do a test.
I wouldn't wait and I would even dare to err and even fail at the U.N. Because I'll tell you what. You want to at least be able to say, if you don't have the votes later and they do test, "I told you so." But if you wait until they test, I'm telling you right now there are going to be pressures from a number of other countries, including our own, to test weapons of our own.
LISOVICZ: Henry, but how much leverage does North Korea really have? Its people are starving. China was at the talks. The Soviet Union collapsed a long time ago. Is this really just more bluster than anything else?
SOKOLSKI: In the long run, they don't have leverage. In the short run, they could ruin your entire afternoon.
And I think you've got to take what they're saying seriously, and I don't think just patting yourself on the shoulder and say, "Oh, well, they're bluffing." Can you imagine if your child was being bullied, if they handled the situation on the playground by saying, "Well, he's bluffing." That's a prescription for getting yourself in a lot of trouble. You have to take it seriously. Get all of your friends to surround the bully, and confront the bully and get the bully to stand down. That is what we need to do in the short run.
TULLY: Now if we do, Henry, bring North Korea to -- in front of the U.N. and sort of make a spectacle of them, as you're recommending, and also, as you mentioned, I believe previously, one of the other things that we should do is to make sure that President Bush says that you're not going to export the spare parts for the nuclear equipment that North Korea already has in place.
It's amazing, in fact, that they are putting in reactors that are based on American technology. That's another step we should take.
But if we do those things, what is the most likely scenario going forth? They have a couple of million troops on the border with South Korea. They're saber ratting. What, realistically, is going to follow our confronting them much more directly as you're recommending?
SOKOLSKI: Well, I think what will follow is either a change of heart, or more likely, you're going to have a competition, much like we had against the Soviet Union. And it's not going to go hot, because they can't win a war, and we have no interest in launching a war. But in due course, they will either change voluntary or they will give way to a better form of government. And this will take time.
CAFFERTY: The great fear is they become nuclear arms merchants to the rest of the world, particularly countries in the mild east and that's a very terrifying scenario.
SOKOLSKI: Right. Well, I think one of the things that President Bush launched that makes sense is this Proliferation Security Initiative, which needs to gain ground and ought to get U.N. Security Council backing, which is to get the power to do more interdictions to prevent precisely that.
LISOVICZ: Which countries specifically, Henry, are you most concerned about? North Korea supplying nuclear weapons to who?
SOKOLSKI: Well, I think we ought to be worried about North Korea in and of its own right. I mean, ElBaradei, who is the head of the International Atomic Energy Agency, said today that it was the greatest threat, that it was guilty of nuclear blackmail and it shouldn't be trusted. That's enough right there.
But surely, we have to also worry about its cooperation with Iran. I mean, there is a small colony of North Koreans working on nuclear projects and rocket projects in Iran.
CAFFERTY: We had this report earlier in the week, that traces of highly enriched uranium have been found inside Iran by nuclear weapons inspectors. The government in Tehran passed it off as some sort of contamination that occurred on a piece of equipment they'd bought a long time ago. And "Gee, we can't remember exactly where it came from," which seems a little skinny to me.
But what do you suppose Tehran is thinking as they watch the negotiations with North Korea?
SOKOLSKI: Well, they're waiting to see whether or not we will indulge these insults and threats. And they will demand nothing less in the way of negotiations before they give anything up of their own with regard to inspections or the like.
After all, Iran has been brokering as best it can privately in Europe the idea of a big deal, that they would somehow open up their facilities to more inspections in exchange for any number of demands and goods. And they're certainly talking with the North Koreans to see what the market will bear.
So sticking to the script of the actual charter of the International Atomic Energy Agency, which says when you have a violator, you report it to the U.N. Security Council, which is what they do in February, and actually getting the U.N. to take that report and vote a resolution on it, is following the numbers on the top of the box. And it's what we need to be doing now.
LISOVICZ: It's an unfolding story and thank you for keeping us updated on it. Henry Sokolski, director of the Non-Proliferation Policy Education Center.
SOKOLSKI: Thanks for having me.
LISOVICZ: Ahead on IN THE MONEY, the old guard and the young guns. Retirement's moving closer for the Baby Boomers. Find out why that could mean a surge in jobs for the next generation.
Plus -- hog wild. Those Harley Davidsons turn 100. We'll test drive a great American brand and its stock, by the way.
And big bucks at the big board. Dick Grasso's paycheck goes public. Find out what you'd be making if you were boss of the New York Stock Exchange.
LISOVICZ: We've been telling you for months about how lousy the job market is, and unfortunately, it's not much better this week.
But relief may be on the way. Not because the economy is catching fire again, but because America's working population is changing.
Joining us now from San Francisco with more about that, "Business 2.0" senior writer Paul Kaihla.
Welcome to the program.
PAUL KAIHLA, "BUSINESS 2.0": Thanks for having me.
LISOVICZ: So it's really just the fact that so many Baby Boomers are nearing retirement that there is going to actually, finally, be some jobs out there?
KAIHLA: Well, there's a number of things happening, actually. When you look at the economic growth we have through the 1980s and 1990s, say 3 to 3.5 percent GDP growth a year on average, that was really fed by a workforce that was expanding tremendously. The workforce in absolute numbers increased by 50 percent during those two decades.
And what's happening now is that growth is stopping. It's not just that the Baby Boomers are going to be leaving the workforce, loosening their ties to their work places. It's that the generation coming behind them is so much smaller.
At the same time, the female participation rate in the workforce has topped out, and at the same time as that, the growth in education within the workforce is flatlining.
So there's kind of like four things happening at the same time.
TULLY: Paul, one of the things that Americans, we're all products of immigration in this country, and immigration has filled the vacuum if we've needed more workers, especially highly educated workers. Because there are millions of people from all over the world with Ph.D.'s, physicians, very well educated. Foreigners would love to work in the U.S.
We've always been a magnet for immigration. Can't immigration solve that problem?
KAIHLA: Immigration would be about the only salvation to fill the worker gap, as economists call it, which is projected to be 14 million skilled workers in 2020, and about 20 million workers overall.
The immigration allotments would have to about double immediately and stay there each year for the next decade to plug the worker gap.
CAFFERTY: Let me play devil's advocate with you a little bit on this. People's 401(k)s are in the toilet because of the collapse of the stock market.
The retirement age keeps getting pushed back to qualify for all of the Social Security benefits. Now you've got to work beyond 65.
Health insurance is simply unaffordable. So if you don't have health insurance benefits and you're not quite to Medicare eligible age yet, a lot of people are working part-time.
People are living longer. The cost of living goes up, education costs, along with health care costs skyrocketing. I know about that; I just paid a tuition bill for my daughter.
What makes you think that people are not, even the Baby Boomers, going to have to work longer because they live longer and it's getting tougher?
KAIHLA: The negative wealth effect on the retirement trend line has been debated quite a bit. And if you look back over history, neither bull markets or crashes, like in the late '80s have budged that trend line. And it has moved steadily downward. The mean age for retirement in 1950 was 70 years. It is currently 62 years.
The Social Security administration, of course, looks for every possible way to prove the solvency of the system, and when they've looked at the claw backs in the reforms to Social Security, they assume that it will have absolutely no effect in budging that mean age of retirement higher than 62. Their projections show it will rise marginally, just by a few months.
But they don't expect the Baby Boomers to behave any differently than previous generations.
TULLY: One of the things that I found in your article that was a real revelation is that the educational standards and qualifications of the coming generation have not improved over time. What accounts for that?
KAIHLA: Well, it's more that -- I mean, we have a huge rate of participation in post secondary education, and it's almost at such a ration point it's leveled out at 60 percent. The main problem is that we have a generation of 76 million Baby Boomers, who have formed the vast majority of the so-called prime age workforce, and waiting in the wings is a generation that's only 46 million. They are maybe marginally more educated than the Boomers but they're numerically smaller. So this combines into that flat line that we show in the article.
LISOVICZ: Paul Kaihla, very interesting article. The unemployment right now at 6.2 percent. But you say there is a coming job boom.
Paul Kaihla, senior writer, "Business 2.0." Thanks for joining us.
And there's certainly a lot more to say about the employment picture, both present and future. So starting next week on "AMERICAN MORNING," our very own vacationing Andy Serwer will be back and he'll present a series called "Where the Jobs Are." That begins this Tuesday, September 2 at 7 a.m. Eastern.
CAFFERTY: If he doesn't stop taking time off, there'll be one at "Fortune" magazine.
Coming up on IN THE MONEY, a heavy metal hit at 100 years of age. Harley Davidson is riding high. Find out whether the motorcycles are as much fun to invest in as they are to ride.
And young bucks, the only thing toughing than raising teenagers is trying to sell stuff to them. We'll tell you about some companies, though, that try to stay one step ahead of what's hip among the younger population.
IN THE MONEY is back after this.
LISOVICZ: Let's look at the week's top stories in our "Money Minute."
Gas prices started the week at just a penny below their all-time high. The Lundberg (ph) survey shows prices shot up during the middle of the month by 15 cents. That was the biggest increase in the survey's 50-year history and just in time for that big driving Labor Day holiday.
The nonpartisan Congressional Budget Office now says it expects an even bigger federal budget deficit in the coming years. The CBO's latest projections call for a $401 billion deficit this year and a $480 billion shortfall in '04. Both would be record highs.
And Oklahoma has become the first state to charge former WorldCom executives with crimes connected to the company's accounting fraud scandal. The indictment names six defendants, including former CEO Bernie Ebbers and former chief financial officer Scott Sullivan.
Attorney General John Ashcroft has urged Oklahoma to hold off on its indictment, because it may interfere with the federal investigation of WorldCom. But Oklahoma's attorney general says he doubts his state will be the only one to pursue this case.
And can you just hear it in Oklahoma, all the people pounding the AG's office?
CAFFERTY: You know why John Ashcroft didn't want them to do this in Oklahoma? Because it makes the federal government look as inefficient and slow and pokey and ineffective as they have in prosecuting WorldCom and Enron.
I mean, if the folks down there in the attorney general's office in Oklahoma can figure out enough charges to lock Bernie Ebbers up for 150 years, what the hell is that big bureaucracy in Washington, D.C., that's supposed to be enforcing the nation's laws, doing?
LISOVICZ: With all due respect to Oklahoma, you know, I mean, it's Oklahoma that's coming. It's not New York.
CAFFERTY: What are you trying to say, Susan?
LISOVICZ: Well, what I'm saying is that there are...
CAFFERTY: Spit it right out.
LISOVICZ: ... people everywhere who are ready to jump on the band wagon.
CAFFERTY: The same thing, Sean, with the Enron investigation. I mean, this stuff has happened years ago now, and nobody's gone to trial. Nobody's in jail. Nobody's gone anywhere.
The guy in Oklahoma says, "Hey, this is an $11 billion fraud. I'm going to throw your can in the can."
TULLY: Yes. The single biggest outrage, Jack, for investors in America isn't so much -- it isn't the money they lost as the fact that these guys aren't in jail. That no one was being indicted. No one was being prosecuted. These notorious names are out there, living very well, collecting deferred compensation, bonuses and paying their expensive lawyers.
LISOVICZ: Hiding behind -- in their mansions.
TULLY: Yes. So this is very refreshing, and you've got give these state prosecutors a lot of credit.
TULLY: If it's Spitzer who jumped over the SEC -- he is very aggressive in New York -- or Oklahoma. There's real competition among these agencies to nail these guys, and it's very healthy.
CAFFERTY: Yes, but wait until the next congressional budget hearings. They'll all be sitting there saying, "We just don't have enough resources to do the job." Hey, if they can do it in Oklahoma, you know what I mean?
LISOVICZ: We know what you mean.
CAFFERTY: Who would have thought custom made motorcycles would lead the way to big profits? But what was a little tiny company from Wisconsin, the only company is Milwaukee of any significance that didn't make beer.
But not only has Harley Davidson become a brand name powerhouse but also one of the few companies that's weathered the stock market downturn with no apparent harm done. Au contraire. Their profits are doing just fine, thank you very much.
Looking at Harley Davidson shares over the past five years, you can see a steady rise, especially during the worst periods for the rest of the market.
Harley Davidson, 100 years old this weekend. And they're having a big old celebration out there.
LISOVICZ: With beer and bikes.
CAFFERTY: And leather jackets and everything.
And Harley Davidson's our stock of the week.
Secret to their success. You know, American car companies have a tough time competing with the Japanese Hondas and Mitsubishis and Toyotas. Harley has got no problem.
LISOVICZ: But you know, it's interesting you mentioned the Japanese. Because Harley actually did have a slump at one point and borrowed very heavily from Japanese management, inventory, and totally turned it around. At a time when we are lamenting the fact that nothing's made in America, this is made in America and is an icon the world over to people who love hogs.
CAFFERTY: Were you a biker chick when you grew up?
LISOVICZ: That's a very leading question, Jack, but check my tattoo.
TULLY: You look at -- I went back and looked at the stock chart for Harley Davidson. It looks like a cardiac patient who was dead and then came back to life.
TULLY: This thing was practically bankrupt in the mid '80s and then came back and went from probably cents on the dollar back up to $60 a share. It's a $15 billion market gap.
It's an extraordinary story, but they have an aging demographic.
CAFFERTY: Yes. TULLY: A lot of bikers now are in their 50s. We don't know if they're going to be replaced by a younger generation of bikers, so -- but they have the excess -- demand is still out there for their bikes. They can't make them fast enough.
CAFFERTY: You've got to get on a waiting list to buy one, right? So -- And the prices are up there, too. I mean, they're not like what they were when you and I were young, Sean. Or at least when I was young.
Still ahead on IN THE MONEY as we continue, adolescent angst. We'll find out why it's so tough to sell to teenagers and which companies have figured out how to do it.
Plus, the doofus in the gray flannel suit. Now, there's a large category. Even bright bosses do dumb things and the proof's in a book called "Why Smart Executives Fail." We'll talk with the guy who wrote it, Dartmouth business professor.
Stay with us. You're watching IN THE MONEY.
LISOVICZ: American teenagers spent about $120 billion last year, a large part of that went to the big clothing stores as kids tried to get the hippest duds. But the companies looking to keep that cash or grab a bigger share of it better have a crystal ball in the board room. That's because teen trends change before most corporate marketers ever figure it out. Joining us now to discuss how sales to teens can translate to dollar signs in your portfolio is Roben Farzed, contributing editor at "Smart Money" magazine.
ROBEN FARZED, SMART MONEY MAGAZINE: Hi, how are you?
LISOVICZ: I'm fine, thanks. And this is a growing market, is that correct? It's not only teens now. It's tweens, because they have all of that allowance, all that disposable income, and they want brand names, but they have to be here and now, hip, hot.
FARZED: Yeah, we're broadly talking about the market, the gen "Y" market, which is roughly up to age 26. You have people with disposable income, some of them, the tweens are actually hitting up their parents for money, but later on, when 16, 17, get into college, you have your own disposable income, and increasingly, teens are just throwing it at the clothing market and other subsets.
TULLY: One of the things that you mention in your story is that the teens are going back to materialism, that there was the grunge movement, and kids were going to secondhand stores, and now they're buying more expensive, more upscale merchandise. Tell us what kind of things are popular, and in that category. FARZED: Prime example there is Abercrombie and Fitch, which, despite this recession, I mean, it's looked at as an upscale clothing retailer and it refuses to slash prices. It makes its catalogue elusive. You have to be 18 or older to buy it, because there are certain scantily-clad models. The image they're trying to cultivate is one of an aspirational brand. It's premium, and they're not going to go downmarket. And teens are receptive to this. It's not just, you know, Joan Collins from "Dynasty" going out and buying an expensive dress. Teens seem to be receptive to this as well.
CAFFERTY: How do you stay ahead of these kids? We mention they change their minds as often as they change their clothes. Presumably a fashion designer comes up with an idea, has to sit down with an artist, they draw up something, then they got to make a test model, if you will, and then they got to put it on a model and they got to shoot some pictures and they got to test market it, and they mass produce it and they advertise it, and finally, they ship it into the stores. The kids can be in Detroit by then looking at something entirely different. What's the key to staying ahead of them?
FARZED: Dead on. I mean, you have to micromanage your marketing staff. You have to throw millions, tens of millions sometimes at finding out what cool is, and then turning around and mass producing it, and seizing that market. You can look at The Gap, which was in its hey day in the late '90s. I mean, everybody loved those commercials. They were like music videos, and yet they made this one bet on leather a couple of seasons ago and that was a disaster, and they're still hurting, they're still reeling, because teens perceive them to be irrelevant or tone deaf.
CAFFERTY: Is this thing with Madonna going to bring them back, or is she passe with kids now, you suppose?
FARZED: No, no, she's great. And it's not just Madonna. I believe they brought in Missy Elliott as well. So they bridged the gap to the current music revolution.
LISOVICZ: But you know, Roben, another aspect of The Gap, one its subsidiaries, if you will, is Old Navy. Remember when Old Navy had performance fleece? It worked one season. Next season it sort of died out, but they were still pushing it. That's the problem. You really have to hit that -- you have to execute so well. Who does it now? What are some of the names other than Abercrombie and Fitch?
FARZED: We mentioned Abercrombie. On the other end of the clothing spectrum in terms of value pricing is Aeropostale, which only went public in 2002. But for all these materialistic teens, you have an equal amount or perhaps more who are value-minded, who do control a significant, you know, number of purse strings but want to be careful with their money, and Aeropostale gives them something, a value proposition. They give them clean, chic, neat-looking clothes, sometimes athletically oriented, but at a value price.
TULLY: Roben, one of the things about this market, though, even though it's a very tough market to judge and to follow and to get your timing right, it's a very homogeneous market in a lot of ways, right, because if you tape -- and an ad agency did this a few years ago -- the bedrooms of teenagers from New York, to San Diego, to Chicago, and then you do it all over the world, in Indonesia, or Russia, everywhere, they have the same stuff. They've got the Nike shoes and they've got the wallpaper of wall hangings of Michael Jordan, and it goes on and on. The icons are the same. The music is the same.
So isn't this a mass market? Aren't there certain economies of scale in advertising to a market that's this homogeneous or not? Or is there a lesson in niche marketing there, too?
FARZED: Absolutely niche marketing. I mean, you look at a company like Hot Topic, which is another one that really intrigued us. They realized there's this whole subset of highly ironic and alternative teens, people that want to buy rock clothing, studded bracelets, and within that subset, there are -- I mean, it sounds kind of cruel, but there are these outcasts who also want a subset niche store, and they're catering to that. And this is on the other end of the spectrum when you look at an Abercrombie and Fitch that likes to market clean, preppy, expensive. Hot Topic is on the other hand, it's dirty, it's ironic, it's alternative, decidedly alternative. So you can't just paint everybody with one brush stroke.
LISOVICZ: Roben, just very quickly, talking about Hot Topic. What is the hottest accessory a teen must have this fall?
FARZED: Oh, boy, I mean, that's all over the place. I mean, here's the thing.
TULLY: Pick one.
FARZED: You have to ask your kid. You have to ask your kid. You know, Jack mentioned you have four of these kids to ask.
LISOVICZ: We'll talk to Jack later. In the meantime, we'll thank you, Roben Farzed. Sorry for putting you in the hot seat. Contributing editor...
FARZED: No, I have no idea. Thank you.
LISOVICZ: ... "Smart Money" magazine.
CAFFERTY: You know what the answer to that is?
LISOVICZ: What is it?
CAFFERTY: A credit card.
CAFFERTY: If they have those...
LISOVICZ: Whether it's green, gold, platinum...
CAFFERTY: ... good to go there, you know. LISOVICZ: ... it's the hottest accessory for teens. Thanks, Jack.
Just ahead -- we'll look at the most common mistakes made by today's CEOs. Find out if your company is being run by a blundering boss.
And big bucks at the Big Board. New York Stock Exchange chief Dick Grasso's pay package is a lot richer than we all thought. Details coming up.
CAFFERTY: No shortage of mishaps, mistakes and miscalculations in the corporate world over the last couple of years. We here on IN THE MONEY work for AOL Time Warner. From accounting scandals to misguided mergers, there's enough material to fill a book, and don't you know that's what our next guest has done. His book is called, "Why Smart Executives Fail, and What You Can Learn From Their Mistakes." Sydney Finkelstein is a professor at the Amos Tuck School of Business at Dartmouth University. Joins us now from Manchester, New Hampshire. Professor, it's nice to have you with us. Thanks for joining us.
SYDNEY FINKELSTEIN, AUTHOR: It's my pleasure.
CAFFERTY: We all like to look at train wrecks. What are the biggest booboos in the book?
FINKELSTEIN: Well, there's a whole book full of them running from hundreds of millions of dollar mistakes, to billion-dollars mistakes. Samsung, in the auto business, where they decided to go into autos, to the large extent because Chairman Lee loved cars, believe it or not. I spoke to a good half dozen people who gave me the same type of story, $5 billion mistake. Iridium, if you remember, terrestrial, satellite-based cell phone system developing a cell phone that would cost you $7 a minute to talk.
CAFFERTY: That was a good idea.
FINKELSTEIN: Yes. Well, the truth is it may very well have been a good idea at the time they thought of it, which was in the late 1980s, but by the time they launched those satellites, everyone had a cell phone in their pocket and it didn't cost you $7 a minute to do that.
TULLY: Sydney, one of the most fascinating things about your study is the psychology of the kinds of leaders who have these problems. You pointed out that they're not dishonest people, they're not unethical people. They're certainly very smart people, but they get into a trap where they just deceive themselves and they make these horrible mistakes. And you kind of give the profile of the kind of person or the kind of leader who falls into this trap.
FINKELSTEIN: Well, we can think about Jill Barad at Mattel, the former CEO. She was a superstar within that company. She's the one that had built the Barbie brand into literally a $2 billion global brand. And that was what got her the job as CEO. Once she becomes CEO, she decides to adopt essentially the same strategies and techniques that have always used -- that have always worked before for her, which were all about promotion, marketing, branding, and even some hype. Unfortunately, her marketplace was not 10-year-old girls. It was Wall Street, and they didn't really go for that very well.
LISOVICZ: Well, let's go out to the ballpark now, Sydney, because I've enjoyed your book as well. The Boston Red Sox. Here I was thinking that the team has lost all these decades because of the curse of the Bambino, when Babe Ruth was sold to the Yankees. But it's really another factor, and it really figures very prominently in some of the biggest errors committed in business.
FINKELSTEIN: That's right. The Red Sox story, and you know, living in New England, it's always dangerous to talk about the Red Sox at all on any given day, but I'm going to risk it. The Boston Red Sox were the last team to integrate with African-American ballplayers. In 1959, actually in the middle of July in 1959, that's a good 12 years after Jackie Robinson broke the color barrier for the Brooklyn Dodgers. And the question is, well, why were they the last team? And everyone knows the short answer. The short answer is racism.
But what is racism? If we want to -- if we strip away just for the moment the egregious nature and the unethical nature of what racism is, we could say that the Boston Red Sox made a conscious decision not to adopt a major change in how their industry was operating, which, of course, was the addition of talented ballplayers who just happened to be African-American. They were the last team to do that and they paid a huge price.
CAFFERTY: To what degree is the kind of failure you're talking about a cultural phenomena? What I mean by that is, particularly during the last decade of the '90s, we began to deify CEOs and corporate executives. They became larger than life, people like Bill Gates and Jack Welch at GE. And many of them very successful. But is it not unreasonable to expect that a certain percentage are going to succumb to this sense that they are omniscient, that they are some sort of omnipotent force that can do no wrong and begin to run roughshod literally over their own boards of directors, over the recommendations of their financial people. I mean, was that a factor in any of this, do you think?
FINKELSTEIN: I think it absolutely was a factor. And you know, the people responsible are people like me in the business school world, people like you in the media world...
FINKELSTEIN: ... and lots of others who would create this myth of the heroic celebrate CEO, of the CEO who could do no wrong. And we all know that that is just not possible, but we built that up. The stock market was booming, and we naturally attributed that success to the CEO, when in fact there were a lot of other reasons, not just the individual company but the overall economy and the technological revolution, the Internet, and many other things. CAFFERTY: And the stupidity of individual investors willing to buy stocks in companies that had no earnings.
FINKELSTEIN: Well, that's another book, I think.
TULLY: One of the things that was most egregious during the whole period of the boom was the huge premiums paid in mergers. And you could tell up front that the amounts paid over what investors the day before the merger was announced though the company was worth. Here's a company comes along, and pays 80 percent more, 50 percent more, even 30 percent more. Most of those deals were kind of dead on arrival, if you really ran the numbers. How did boards and CEOs ever approve those deals? Did they really do any due diligence, really run any numbers? Because the company stocks all suffered.
FINKELSTEIN: Let me say two things about that. Number one, I refer to a study in the book on managerial hubris. And in that study, we found that those CEOs that had the most positive press about them, those CEOs who ended up paying themselves more than anyone else, were more likely to actually pay higher premiums when they when out and made an acquisition. In other words, the more you built yourself up or others built you up, you believed that you could make it work, that a 70 or 80 percent premium was not undoable.
Now, why did it happen? The board of directors is obviously the number one culprit, and we've had and are may be in the midst still of a board revolution in terms of trying to understand what the appropriate methods of corporate governance need to be, but in company after company that I looked at, the board was sitting on the sidelines.
LISOVICZ: Hey, Sydney, we're almost out of time. We've heard so much about the seven habits of successful people. What are the seven habits you found in unsuccessful people?
FINKELSTEIN: Well, there's a whole bunch, and a couple of them real quick. The belief that you have all the answers. We think that CEOs should have answers, but when it goes over the line to the extent that you think you've got to have all the answers, and no one else could help you, no one else could provide any insight, we run into trouble. That happened at Rubbermaid, it happened at Mattel and the Jill Barad story.
Another one is, when the CEO believes that the company becomes an appendage to himself as opposed to he or she working within the company. When you become an appendage to yourself, when the company becomes an appendage to yourself, you believe that you can do almost anything you want with that company. And I think that's part of the story behind some of the corporate scandals at companies like Tyco and Enron and ImClone.
CAFFERTY: Professor, we're going to have to leave it there. I appreciate you joining us on IN THE MONEY. Thank you for being here today. Professor Sydney Finkelstein, author of "Why Smart Executives Fail," and professor of management at Dartmouth University. Thanks a lot. FINKELSTEIN: Thank you.
CAFFERTY: All right. Coming up -- he wasn't exactly Mr. Popularity before. But now that we know how much money NYSE Chairman Dick Grasso is going to make this year, he's really making some people mad.
And if you're mad, or happy or somewhere in between, you can tell us all about it. Think of us as your electronic couch. You can come here for therapy. We'll listen to your problems and probably ignore them. But you can write to us anyway, firstname.lastname@example.org and we'll read some of the more interesting e-mails in a moment. Before we go to break, it's time for Andy Serwer's lesson on the Federal Reserve Bank this week's edition of "Fortune Fundamentals." Watch.
ANDY SERWER, FORTUNE MAGAZINE: You often hear about the Federal Reserve Bank on the news, but what exactly is it and what does it do?
Well, think of the Federal Reserve Bank, or the Fed, as the bank of our overall economy. It's the bank of banks, and the bank of the U.S. government. The Fed oversees banks and thrifts, manages the nation's money, and influences the economy.
By raising and lowering interest rates, the Fed can either pump up or slow down the economy.
The part of the Fed you hear about the most is the FOMC, or Federal Open Market Committee. This is the group of folks who decide whether to raise or lower interest rates. The Fed raises or lowers the Fed funds rate, which is the interest rate banks charge each other, which influences other rates. The Fed cuts the Fed's fund rate if it thinks the economy is slowing down and may head into a recession. The Fed raises rates if it thinks the economy is overheating, causing prices to rise. That's inflation.
Recession and inflation, the Fed is constantly looking to steer the economy right down the middle. By the way, one thing the Fed can't do is raise or cut taxes. That's up to the president and Congress.
CAFFERTY: This is turning out to be a very good year, indeed, for New York Stock Exchange Chairman Dick Grasso. Mr. Grasso is going to cash in a number of retirement packages this year, on top of a hefty regular salary. His grand total, boys and girls, for 2003 will be $140 million. A number of watchdog groups say that Grasso's pay package makes him a questionable candidate to continue as a top market regulator.
Whether you disagree with the dollar number amount or not, they say timing is everything. The timing on this announcement is awful. This is supposed to be a time of increased attention to corporate governance, increased transparency.
LISOVICZ: And Dick Grasso has actually been one of those voices on corporate governance.
CAFFERTY: Who decides these kinds of numbers? Does the board of directors have anything to do with it?
TULLY: The board of directors is made up primarily of the Wall Street firms, or the CEOs, a lot of the CEOs of the Wall Street firms.
LISOVICZ: Who are typically used to lavish salaries.
TULLY: Who are used to lavish salaries, and even they expressed in the papers today a lot of surprise, shall we say, at Mr. Grasso getting paid more than they did, and these are guys who love to be overpaid and normally love to see other people overpaid, because they think they can get more for themselves.
LISOVICZ: Just two quick points, though. Dick Grasso started out -- he is the first chairman of the New York Stock Exchange who actually started out there. He didn't come from a big Wall Street firm. He's worked there 36 years. By all accounts, he's had a terrific career over the time. This is his retirement package. There's no question about it, that it's not a regulator's retirement package. Alan Greenspan makes under $200,000 a year. I do not think that a man who is called the second most powerful man in the world, Alan Greenspan, will draw anything like that.
CAFFERTY: This is his retirement package. He makes a salary of over $10 million a year in addition, just for showing up down there, right?
TULLY: Well, Jack, he was banking a lot of his bonuses.
CAFFERTY: Oh, OK.
TULLY: Right. So a lot of what we're seeing is the accumulated bonuses, plus interest, and he was getting a very hefty rate of interest guaranteed every year, which is one of the reasons why the NYSE, I think that they were right to do this, ended that. So they no longer have to keep paying him interest way above market rates. They were able to get out of what was a very expensive contract.
LISOVICZ: And one of the great victories here is the fact that it is disclosed. His compensation package, any chairman's of the NYSE, including Mr. Donaldson, who used to be head of the NYSE, was Wall Street's best kept secret. So yes, everybody can react. Shareholders, people on the street. People can talk about it and he has to face the music.
TULLY: But we need to see a lot more of the details of this package. Because there's a lot of speculation out there. What we saw were the totals but very, very little of the workings of how these different accounts worked.
CAFFERTY: My hunch is the aroma from all of this isn't going to dissipate quickly.
LISOVICZ: It's not exactly Chanel number 5 is what you're talking about.
CAFFERTY: Very well put.
Last weekend, we asked you said whether the U.S. should send more troops to Iraq, keep the same number of forces there, or pull out altogether. Here is some of what you wrote to us. Farooq writes: "The most important thing is to finish the job we started. It takes more troops to finish the job, both in Iraq and Afghanistan."
Diana from Texas wrote this: "We need to leave Iraq. We should have never invaded. One bullet from a paid assassin could have rid us of Saddam."
And Laura wrote: "Keep the forces the same. The news is not as bad over there as the media is reporting."
Now it's time for this week's e-mail question. In light of our report on the big mistakes that CEOs often make, we'd like to ask you, what is the dumbest thing your boss has ever done?
LISOVICZ: And you can't write in, Jack, you cannot write in.
CAFFERTY: I was all set; I was going to put pen to paper.
Send us your answers, email@example.com.
That is the end of the program for now. We thank you for watching. Thanks as always to our panel of experts, CNN financial correspondent and my old partner, Susan Lisovicz, and in for Andy Serwer this week, "Fortune" magazine senior writer Sean Tully.
Join us tomorrow, 3:00 Eastern time, when we'll look at how enforcing the anti-terrorist Patriot Act is going to end up costing businesses and you and me more money. Surprise, surprise. We'll ask whether all that money will create results. That's tomorrow on IN THE MONEY, 3:00 Eastern time. We'll expect you to watch. After all, you could give one hour of your weekend to this program. It's not too much to ask.
We'll see you then.
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Retirement; Harley Davidson Turns 100>