CNN IN THE MONEY
Government Suveillance Will Affect Your Handling Of Money; Do Companies That Market "Gays" Pay Off?; A Primer On How Companies Keep Up With Teen Trends.
Aired August 31, 2003 - 15:00 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. On today edition of IN THE MONEY: Best pal or big brother of? Attorney General John Ashcroft is on the road talking up the Patriot Act. We're going see how a surge in government surveillance could change the way you handle your money.
And, thinking pink: Gay culture is out of the closet in this country now, and very much in the spotlight. Shows like "Queer Eye for the Straight Guy" prove it. We'll find out whether companies that market to gays pay off for investors.
And hot stuff for the hormonally challenged. Winning over teenage consumers means knowing how to tell a live trend from a dead end, and they change frequently among that group of the population. We'll fill you in on some companies that think they have it all figured out.
My partners on the panel today, CNN correspondent Susan Lisovicz and "Fortune" magazine senior writer Shawn Tully, who's in for the still vacationing Andy Serwer, who gets more time off than anybody else at AOL Time Warner.
SUSAN LISOVICZ, CNN CORRESPONDENT: It's part of his compensation package.
CAFFERTY: He and Dick Grasso have got a good thing going. The stock market is front running some every-improving pieces of economic data. However, not unlike before the bubble burst, the NASDAQ is just being silly about it all.
SHAWN TULLY, "FORTUNE MAGAZINE"" And the amazing thing is that the highest-paid salesmen in the world, who populate Wall Street, are telling you that the higher it goes the higher it's going to go.
TULLY: Whereas the absolute opposite is true. When a bond goes up in price, the return you get from the bond goes down.
CAFFERTY: Goes down.
TULLY: The same is true from stocks. People really cannot believe what they're hearing out of Wall Street. They were conned once into buying stocks at the peak of the bubble, and now they're very, very expensive. So, the stock market is not a great place to be right now.
LISOVICZ: And talking about raging hormones, you talk about these investors, these investors who are just so hot to get back into it. It's really kind of remarkable that given the losses that everybody sustained with the exception of maybe Bernie Ebbers and, you know, a few folks at Enron, it's remarkable that people are so willing to get back into it. The NASDAQ is triple what the Dow and the S&P is, 30-something percent year to date.
CAFFERTY: How much it's driven, do you suppose, by the fact that the stock market becomes the investment of last resort in the current economic climate? Interest rates are to the point where you can't make anything on fixed income. The bond market had a nice run, that's over now. Real estate's been a good investment; it takes a lot of cash to trigger a real estate deal, you got to have 20 percent down payment on a -- you know, million-dollar property, or whatever. So the stock market is a place where a person can go and put a few bucks and maybe make a little better than one percent or two percent on their money, maybe.
TULLY: Maybe. But, the problem with the stock market is that multiples are above double their historic average, they're at over 30, and the historic average is 14. So, you risk losing a lot of your capital, and in the bond market, although -- especially corporate bonds are giving pretty good yields and the risks are a lot lower. People should be looking, believe it or not, at junk bonds and corporate bonds because they're not going to go down by 50 percent and you risk having that happen in the stock market.
LISOVICZ: And, if you have a diversified portfolio, you can maybe take some risks.
CAFFERTY: There you go.
Well, whether you call it protection or intrusion, Washington wants to keep a closer eye on all of us and our money. What's new? Attorney general John Ashcroft's on tour this week promoting the Patriot Act, which he is starting to get a little heat for. As part of the act the feds will soon be looking over your shoulder on real estate deals and whenever you invest in mutual funds. Now, for more on all this we turn to Charles O'Neill of Dalbar, that's a financial research firm. He's an expert on fighting money laundering, and he joins us from Manchester, New Hampshire.
Charles, nice to have you with us, thank you.
CHARLES O'NEILL, ANTI-MONEY LAUNDERING SVCS. EXPERT, DALBAR: Thank you, nice to be here.
CAFFERTY: Let me understand something. We can't find Osama bin Laden, we don't know where Saddam Hussein is, we have no -- we have found no weapons of mass destruction in Iraq, but the authorities in the Justice Department want to know if I buy $5,000 worth of a mutual fund. I need some help here.
O'NEILL: Well, actually, any money laundering statutes and regulations have been in place for many years. As you realize now, if you make a transaction of $10,000 or more, a financial institution is already required to file a report to the federal government.
O'NEILL: What will happen is as of October 1 this financial institutions will be collecting more information about you when you open a new account. They'll be taking additional steps to verify your identity, and they will be looking you up on a list of terrorists or terrorist organizations.
LISOVICZ: But you know, Charles, some of it just seems like just basic good recordkeeping. You know, some of the basic rules of the Patriot Act for financial institutions being: verify the identity of anyone opening an account -- duh. Maintain records of the information used to verify the person's identity. Determine whether the person is linked to a terrorist group. I mean, that's obviously upping the ante somewhat, but -- I mean, didn't financial institutions do this before, verify the identity of the user?
O'NEILL: Well, considering that some of the terrorists involved in 9/11 were able to open bank accounts and credit cards with false social security numbers, I'd say that there were some holes in the system back then. And hopefully, we're closing those holes right now. Ah, so yes...
TULLY: Charles, tell us how that would work? How would we be able to trace the people or figure out that the people who caused 9/11, the terrorists who caused 9/11, how would we have found them under the new rules and prevented them from going forward?
O'NEILL: Well, in the context of an organization's business practices, that is, a banking or financial institution, they have to look at the total relationship with each customer, including the amount of money to be invested and satisfy themselves of the identification provided is government-issued, is accurate, is correct, is real and where necessary, take additional steps to further confirm the identity of that person. For example, obtain additional information about other financial relationships, call other financial institutions, and get a general sense of -- that this person is real. And then, of course, looking them up on a list of terrorists.
CAFFERTY: What's this going to cost? And who's going to pay for it? I think I know the answer to the second half.
O'NEILL: I think you know the answer to the second half, that is, you and I and investors will pay for it. And the overall cost of implementation of any money laundering is estimated by some authorities to be in excess of about $200 million a year. Our estimate at Dalbar is that for a paper-based account that is being opened that the cost will rise to about $22 per account from about $7.50. LISOVICZ: So, Charles, that's one consequence, higher fees for the consumer. What about privacy, which many people cannot put a price tag on?
O'NEILL: That's a very good point. There are aspects of this that will be perceived by customers to be quite intrusive, because in fact they are intrusive. In addition to the basic information that you observe that will be required, that good business practice would have suggested they would have obtained anyway, financial institutions will in fact have to get to know their customers better for another reason, and that is to monitor suspicious activity that you might undertake on your various financial accounts.
For example, if you were a bond fund investor and all of a sudden you show up with $100,000 from an unknown source and you want to put it in small stocks and cash it out the next day, someone is going to have to ask what that's all about and monitor that -- your behavior for suspicious activity.
TULLY: Now, are the banks and financial institutions liable if they do not follow up and they do not expose a terrorist when they should have done their due diligence? What kind of possible fines or liability do they face?
O'NEILL: Well, I think it depends on whether there's an action that is a clerical error, that's one type of fine or penalty, and it could be very severe. Or if there's any indication at all that anyone within a financial institution has been a conspirator in assisting in money laundering, there are very severe civil and criminal penalties attached. So, the risk of failure is extremely high and institutions cannot afford to make any mistakes in this regard.
CAFFERTY: Is this federal intrusion into our private lives about reaching the saturation point in your opinion? I mean, a lot of people are getting a little fed up with this stuff.
O'NEILL: Well, the timing of this as of October 1 is unfortunate only to the extent that there is of course, a great deal of identity theft occurring, now. People are very concerned about privacy. My personal opinion is the kind of steps that are being undertaken now, are absolutely necessary and very obvious and basic. And, that arguably all along we should have been asking for further proof of identity of customers.
CAFFERTY: Fair enough.
LISOVICZ: Very good information. Charles O'Neill, anti-money laundering services manager with Dalbar. Thanks so much for joining us.
O'NEILL: You're welcome.
LISOVICZ: Coming up on IN THE MONEY: Out and about. From makeovers to marriage, gay is the new straight. We'll look at how companies are taking aim at the hottest demographic of the year.
Plus, high on the hog: As Harley turns 100, find out whether this classic American brand gives investors a smooth ride.
And smart bosses, foolish choices: Find out the seven habits of highly unsuccessful people. We'll hear from the author of "Why Smart Executives Fail."
LISOVICZ: From the witty one-liners of the makeover squad on Bravo's "Queer Eye for the Straight Guy" to the quirky antics of Jack on NBC's hit sitcom "Will & Grace," American viewers are watching TV shows with gay characters in record numbers. Corporate America is also watching and they've begun tailoring market strategies to appeal to gays whose spending power is about $485 billion a year. Joining us to talk about this is Wes combs, co-founder of Witech Combs Communications, a firm that specializes in marketing to gays.
WES COMBS, WITECK-COMBS COMM.: Thank you.
LISOVICZ: This is -- the success on TV is something that really post-dates something that's already been happening. Advertisers and marketers know that there is huge disposable income in gay Americans, gay consumers.
COMBS: Absolutely. There've been a many -- there've been many companies that have been ahead of the curve understanding that gay and lesbian Americans have more discretionary income than average Americans, because only 20 percent of them have children in the household. So, they have extra money to spend on luxury goods and travel. So, you've seen the travel industry far ahead, you've seen the high-tech industry ahead of the curve because they understand that gay people are early adopters of technology, as well.
TULLY: Wes, to what extent do the gay customers follow the news about companies, how they treat domestic partners, whether they extend medical benefits to domestic partners, and do they judge companies and do they form their consumption habits based on some of the things that they've learned or follow about those companies and how they treat their gay employees?
COMBS: Absolutely. The research that we've done with Harris Interactive, over the past three years, has shown that gay and lesbian Americans are very brand loyal to companies that treat their gay and lesbian employees favorably. So, there is an organization known as the Human Rights Campaign which has a document known as the "Corporate Equality Index," which actually was just released this week, which ranks every company in the Fortune 500 on whether they have domestic partner benefits, whether they offer -- have -- tailor their advertising to gay and lesbian customers, whether they have an employee resource group that actually allows gay and lesbian employees to speak to management about their issues. So the brand loyalty factory is very high and that's why companies that are tailoring their advertising to this segment are going to receive a greater chunk of the change, so to speak.
CAFFERTY: Are there particular challenges associated with marketing brands at the gay community?
COMBS: Well, I think each company has to market to this segment like they market to other segments. For example, if you -- in the case of American Airlines. Often American Airlines only features destinations in their ads. So, in order for it to be made tailored to this segment, you might use copy in the ad as a way of tailoring it. But, if you have imagery in your ads, if you show people in your ads when you're advertising in mainstream publications, it just makes sense to put same-sex imagery in the ad. For example, if you had an ad in "Ebony," you wouldn't put white people in the ad, probably, if you're trying to reach African-Americans.
LISOVICZ: But, are there certain lines that still cannot be crossed? You know -- I mean, some of the companies out there marketing directly to gays are some of the most blue chip companies, I mean, you've got IBM, Ford Motor, Volvo, Jaguar, Land Rover, but are there certain areas -- places they just will not go?
COMBS: Well, I think a lot of it has to do with being careful about not -- they're concerned about not alienating their current customer set. And certainly, across this country there is different levels of acceptance of gay and lesbian people. But, statistics show that 6 percent to 7 percent of the population self-identifies as gay. You can see through the current events that are happening in the news, gay people comprise every aspect of our country and I think as the culture is much more accepting and more gay people come out, I think the greater comfort they'll have with seeing gay people represented in different ways and not just standing side by side, but even being able to show affection without offending other people.
TULLY: Is there any indication that there is a backlash in certain parts of the country? Most gay people do live in urban areas, although that's changing to some extent. But, do some companies, perhaps, who market in the more rural markets face a backlash from gay advertising, or from targeting gay consumers?
COMBS: None of the research that we've shown has shown that any backlash or boycott has ever had any impact on a company negatively. So, I think that while you might see in more conservative parts of the country, people more vocal about their discomfort with people who market to this segment, there's no proof that it's been effective and I think that it just matches where there's more conservative aspects, that's where you see this vocal opposition.
LISOVICZ: Wes, which companies or which sectors do best targeting gay consumers?
COMBS: Well, one of the first companies, or first sectors to do this was the high-tech industry. IBM has been a leader in this area because they understand that they need to keep the best and brightest employees working for their company and so they understand that treating those employees best is going to make sure they're working for their company and not others. The travel industry, American Airlines, for example, has been in this market for over ten years. They understand that this segment is very brand loyal. And you're seeing with the introduction of the automobile manufacturers, Ford, their Volvo and Jaguar brands, have tailored specific advertising and are even giving money as donations to non-profit organizations as a way of showing they care about this community if you purchase from them.
CAFFERTY: Fair enough. Wes, we're going to have to leave it there. Appreciate you joining us. Thank you very much.
COMBS: You're welcome.
CAFFERTY: Wesley Combs, co-founder of Witeck-combs joining us from Washington, D.C.
Just ahead on IN THE MONEY, Haley-Davidson celebrating its 100th anniversary. Is the company's stock something that should get your motor running? Susan? We'll look.
And, most of them don't have a job and have to ask their parents for money. I know these things. I raised four of them. That has not stopped teenagers from becoming a corporate goldmine. We'll look at the companies that do the best job of grabbing the youngster's cash.
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 survey shows prices shotup durg 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 non-partisan 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 A.G.'s office?
CAFFERTY: You know why John Ashcroft didn't want to do this in Oklahoma? Because, it makes the federal government look as inefficient and slow and poky and ineffective as they have been 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 people...
CAFFERTY: So, spit it right out.
LISOVICZ: People everywhere who were ready on the bandwagon.
CAFFERTY: Well, I mean, the same thing's wrong 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: Yean, the single biggest outrage, Jack, for the investors in America isn't so much even 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...
LISOVICZ: And living pretty well.
TULLY: ...these notorious names have been out there, living very well, collecting deferred compensation, bonuses, and paying for expensive lawyers and...
LISOVICZ: Hiding behind -- in their mansions.
TULLY: Yeah. So, this is very refreshing. And you've got to give these state prosecutors a lot of credit...
TULLY: ...whether it's Ppitzer, who jumped over the SEC...
Here in New York, right?
TULLY: ...and was very impressive in New York or Oklahoma. There's real competition among these agencies to nail these guys, and it's very healthy.
CAFFERTY: Yeah, but wait until the next congressional budget hearings, they'll all be sitting there saying -- you know, 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 that custom-made motorcycles would lead the way to big profits for what was a little tiny company from Milwaukee, Wisconsin? The only company in Milwaukee, of any significance, that didn't make beer. But, now not only has Harley- Davidson become a brand name powerhouse, it's also one of the few companies that's weathered the stock market downturn with no apparent harm done. Oh contraire, their profits are doing just fine, thank you very much.
Looking at Harley-Davidson's 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 up there.
LISOVICZ: With beer and bikes.
CAFFERTY: Oh, 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 is -- has got no problem.
LISOVICZ: But, you know, it's interesting you mention 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 -- were you a biker chick in your younger life?
LISOVICZ: That's a very leading question, Jack, but check my tattoo.
TULLY: But 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. 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 -- $15 billion market cap. It's an extraordinary story. But, they have an aging demographic. A lot of the...
TULLY: ...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 bikes, they can't make them fast enough.
CAFFERTY: Sure, 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 they were when you and I were young, Shawn. Or, at least when I was young.
Still ahead on IN THE MONEY, adolescent angst. We'll find out why it's so tough to sell the 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 proofs in a book called "Why Smart Executives Fail," we'll talk with the guy who wrote it, a 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.
(COMMERCIAL BREAK) 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, email@example.com 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, firstname.lastname@example.org.
That is all for this edition of IN THE MONEY. Thank you for joining us. Our panel, as always, Susan Lisovicz, from CNN Financial News, Sean Tully, in for Andy Serwer. Sean also of "Fortune" magazine. Sean spends much more time in the office, however, than Andy does, as evidenced by his appearance here on the program.
We'll see you next Saturday, 1:00. Have a good weekend. And if you're so inclined, I'll see you weekday mornings, 7:00 Eastern, on that fine little breakfast program called "AMERICAN MORNING." Thanks. See you next time.
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