Why Would Anyone Want to Run Citigroup?

Along with its coverage of the Treasury Department's latest and most aggressive plan to rescue and take additional control of Citigroup, The New York Times published an article today that asks, "Who would want Vikram S. Pandit’s job?"

Pandit, of course, is Citigroup's chief executive. And the question raised by The Times was rhetorical, setting up a report on the growing downside of being a chief executive at a time when bonuses, corporate jets and luxurious office accommodations have all been curtailed by popular demand -- especially in the financial services industry. Plus, Pandit recently had the dubious honor of announcing that his bank lost $27.7 billion in 2008, which, as The Times notes, is one of the largest losses in corporate history. With the latest federal lifeline come strings, including a shakeup of the board as demanded by the government, whose taxpayers would own more than a third of the common shares.

Yet as recently as last fall -- when the financial crisis was well underway, but the depth of Citigroup's problems were not apparent -- Pandit was enthusiastic about his job. In a videotaped interview produced by Knowledge@Wharton, management professor Michael Useem asked Pandit about life at the top of Citigroup. Said Pandit: "If you don't enjoy waking up in the morning and [saying], 'I really want to go to work,' you shouldn't be doing what you're doing. A lot of us, over time, will earn the right to say, 'Stop, enough. I don't enjoy that.' Well, that's not where I am. So the bottom line is when you get into that door, you have to go in saying, 'I'm looking forward to everything I'm going to do today.' And that's what I think about when I go in."

U.S. Deficit Would Grow to $1.75 Trillion in Budget Laden with Urgent Measures

To be sure, President Obama inherited a budget deficit. But the budget he is introducing today digs the hole much deeper: to $1.75 trillion. That's nearly four times the current record of $455 billion, and represents about 12% of the U.S. Gross Domestic Product (GDP), a level last seen during World War Two. Obama said this week that deficit spending is needed to repair the damage done by the financial crisis, which he blames on the policies of the Bush administration and Congressional Republicans, and regrettable decision making by both consumers and lenders. The President has pledged to reduce the deficit to $533 billion, about 3% of GDP, by 2013.

While he disagrees with the administration's proposed spending priorities, Wharton finance professor Jeremy J. Siegel suggests that "governments have a very high capacity for debt, and we're not there yet." His bigger concern is about tax hikes included in the spending plan, and what he considers the inadequate use of tax cuts in the economic stimulus plan. "The response has to be big," Siegel says of the various stimulus and rescue plans included in the budget. "I wish the response had been [directed] more toward immediate tax reduction."

Siegel also believes the President may be jumping the gun in proposing a $634 billion fund for universal health care. To help pay for that plan, the administration is calling for additional taxes on the wealthiest 2% of American households. "Health care has to be overhauled," Siegel acknowledges, adding that "Social Security and Medicare are huge budget busters going forward. But I think everything now has to be geared toward getting out of the recession. Other ambitious projects should be put on hold until after we emerge, because we just don't know where we will be."

Additional Reading: Wharton faculty advice to the new President, their views on the stimulus package, and Knowledge@Wharton coverage of Obama's proposals during last year's election.

Is the U.S. Losing Its Competitive Edge?

The United States ranked sixth among 40 countries and regions on 16 indicators of innovation and competitiveness, according to a report by the Information Technology and Innovation Foundation. Of greater concern, perhaps, was that the U.S. finished last in measures of progress over the last decade. “The trend is very troubling,” said Robert D. Atkinson, president of the Foundation, a Washington, D.C., think tank that  promotes "public policies to advance technological innovation and productivity."

The 16 measures considered in the study included venture capital investment, scientific researchers, spending on research and educational achievement. An article about the research in today's New York Times notes that "measuring national competitiveness and the capacity for innovation is tricky. Definitions and methods differ, and so do the outcomes." The Times cited a recent World Economic Forum global competitiveness report, based on opinion surveys, that ranked the United States first. The report issued today by the ITIF found Singapore to be the most competitive nation.

While methods of measuring innovation and competitiveness may vary, there is little debate over their importance to a healthy economy. And hard economic times can provide just the right environment for innovation, especially the sort that can turn an industry on its head, according to Wharton experts interviewed for a recent Knowledge@Wharton article titled, "Why an Economic Crisis Could Be the Right Time for Companies to Engage in 'Disruptive Innovation." In that article, Paul J.H. Schoemaker, research director for Wharton's Mack Center for Technological Innovation, suggested that for some companies, the economic crisis can actually provide an innovation platform. "The crisis has multiple impacts," Schoemaker said. "Loss of revenue and profit will at first instill a cost cutting mentality, which is not good for innovation. But if the patient is bleeding, you need to stop that first. Then, however, a phase starts where leaders ask which parts of their business model are weak (and perhaps unsustainable) and that, in turn, can lead to restructuring and reinvention."

The article also noted growing worry about America's commitment to innovation, citing a 600-page report from the National Academies titled, "Rising Above the Gathering Storm." That study found that leading scientists, research and development experts, and other leaders had "expressed concern that a weakening of science and technology in the United States would inevitably degrade its social and economic conditions and in particular erode the ability of its citizens to compete for high-quality jobs."

For more Knowledge@Wharton coverage of innovation, go to our Innovation and Entrepreneurship section. Read about the top 30 innovations of the last 30 years, the result of a survey conducted by the Nightly Business Report and Knowledge@Wharton.

With Chapter 11 Filing, Can a Philadelphia Publisher Make a Case for Viability?

Journalism's most familiar and enduring business model, the advertising and subscriber supported newspaper, continued to unravel this week as Philadelphia Newspapers, publisher of The Philadelphia Inquirer and Daily News, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The filing follows a path recently selected by the owners of the Minneapolis Star-Tribune and, on an even larger scale, by the Tribune Co., owner of the Chicago Tribune, Los Angeles Times, Baltimore Sun and other newspapers in the U.S.

The filings are a wise move for the publishers, who can use the protection from creditors to buy the time they need to prove that they have a viable business model, according to Wharton finance professor Franklin Allen. If the bankruptcy court approves the protection request, the newspaper company will continue to operate normally while it restructures its debt, probably forcing lenders to settle for only a portion of what they are owed. The company can also use the filing as a lever to extract concessions from its employee unions. More such filings are likely as newspapers watch their main revenue source -- print advertising -- evaporate. "The key issue is whether the managers' view of their operations' viability is the same as the lenders'," says Allen. "It's going to be a difficult case to make. As my son said this morning, 'Who reads newspapers anymore?'"

Actually, more people than ever are reading newspaper content -- but they're reading it online, where the content generates just a fraction of the revenues that newspapers derive from their print product. That dilemma was explored in a recent Knowledge@Wharton article titled, Urgent Deadline for Newspapers: Find a New Business Plan before You Vanish, in which Wharton professors noted that some forms of journalism would likely be supported by more than one of several business models, ranging from philanthropic support to niche services. Some of the models might require a rethinking of traditional journalism values, such as balanced reporting and the hard-and-fast separation of news content and advertising. "Those that [survive] will do so by getting off their high horse and doing things that would have been commercial heresy," Wharton marketing professor Peter Fader said in the article. "Imagine a New York Times book review with a link to Amazon."

Lawyers for Philadelphia Newspapers will begin making their case in a Philadelphia courtroom today. Their challenge may be made a bit more delicate by a fact made public in the bankruptcy filing: Brian Tierney, publisher of The Inquirer and CEO of its parent company, received two pay raises in 2008: from $600,000 to $618,000 in May, and then to $850,000 in December. The company said in the filing that he got the raise because he had assumed the dual role of publisher and CEO in 2006, without being paid extra for more than two years. At the same time, the newspapers' unions accepted pay cuts even as their ranks were diminished by layoffs and buyouts.

For more information: Tierney explains the filing in a podcast on Philly.com.

Wharton Professor Embraces Two Major Provisions -- Sees Hope for a Third

The Obama Administration's plan for reducing the number of foreclosures is "extremely smart and very wise," says Wharton real estate professor Susan M. Wachter. Two of the three parts of the plan are particularly appealing, she says, adding that even the third might turn out to be more of a success than its many critics contend.

Wachter applauds the plan's provision for the Treasury to make $200 billion available to Fannie Mae and Freddie Mac, which, combined with the Federal Housing Administration, back about 90% of residential mortgages in the U.S. That level of support is "a clear statement that the Treasury stands behind Fannie and Freddie," which should provide them with better rates from the capital markets.

Also, Wachter likes a provision that sets a more liberal loan-to-value ratio for refinancing mortgages. Previously, Fannie and Freddie would require costly private mortgage insurance to refinance a loan that represents more than 80% of the underlying property's value. The new rules permit borrowers to take out loans for up to 105% of a property's value, if the applicants are up-to-date on their current mortgages. That provision, she said, will help people who are underwater on their mortgage, meaning they owe more than the value of their home -- a frequent result of precipitous drops in the real estate values. "For many of these people, the refinancing will also put money in their pockets," which would help the broader economy by encouraging those consumers to spend more.

Wachter says the third part of the plan "is the most questionable and understandably gets a lot of criticism." It provides $75 billion worth of incentives for lenders to modify loans so that the payments amount to no more than 38% of a distressed home owner's income. A contribution from the government would reduce the amount to 31%. Critics say the financial incentives may not be great enough to encourage many banks to participate. But Wachter notes that banks which do not participate in the plan may be more likely to become subjects of the government's "stress tests" -- reviews of their solvency required by the latest bank rescue plan. Banks failing the test could be declared insolvent or be forced to accept a cash infusion from the government's Troubled Asset Relief Plan, which comes with strings attached, such as executive compensation limits. "So the question that non-participating banks have to ask themselves is, 'Do I want to be first in line for a stress test?'"

Trustee Tells Investors That Madoff Probably Never Bought Securities

Clients of alleged swindler Bernard Madoff heard some bad news today: "We have no evidence to indicate securities were purchased for customer accounts," said Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's assets. According to the Associated Press, Picard told a meeting of investors that he has recovered $650 million so far and that victims could qualify for up to $500,000 in funds from the Securities Investor Protection Corp., also known as the SIPC.

While Madoff and his firm may not purchased the securities that clients believed he was buying on their behalf, he certainly acquired a lot of trust from sophisticated investors who really wanted to believe that the returns he promised were real, even though they seemed too good to be true. In a recent Knowledge@Wharton podcast, Wharton operations and information management professor Maurice E. Schweitzer and G. Richard Shell, professor of legal studies and business ethics, lamented that trust was another a victim of the scandal triggered by Madoff's alleged Ponzi scheme.

That loss of trust hurts the entire market, Shell asserted in the podcast. "Trust is like lubrication," he said. "It makes transactions easier, faster, cheaper. It fuels the economy, so we can trade. And we've lost some of that trust. So now the costs are going to go up. There's more friction, as we have to do more due diligence. I think that's necessary. And clearly, it was necessary before this. So perhaps the silver lining is that we're going to get back to these basic principles of oversight and diversification."

Madoff was arrested in December after investigators said he confessed to his sons that he had swindled investors of $50 billion. The 70-year-old former Nasdaq chairman is now under house arrest in his Manhattan apartment.

Speaking at Penn, Nobel Laureate Krugman Says the Stimulus Package Lacks Punch

Paul Krugman, who won the 2008 Nobel Prize in economics, and who is a columnist for The New York Times, said at the University of Pennsylvania yesterday that the stimulus package signed this week by President Obama falls far short of what’s needed to jumpstart the economy. Why? The $789 billion plan will replace less than a third of the spending gap caused by the recession. The plan may generate 3.5 million jobs, but they won't amount to a net gain in the face of a recession that is eliminating 20,000 jobs a day in the U.S., he asserts. Click here for more on Krugman's comments.

Leading by Example, GE's Jeff Immelt Takes a Pass on $12 Million in Compensation

Jeff Immelt, GE’s CEO, says he will forgo some $12 million in long-term performance pay, according to a report in the Financial Times this week. While his annual salary will be $3.3 million, the move means his cash compensation will drop 64% from the previous year – a period in which GE’s stock price fell 56%, the report notes.

Wharton accounting professor Wayne R. Guay, who has done research on executive compensation, noted in a recent Knowledge@Wharton article that there are a lot of public relations issues floating around executive pay. “Many companies have come forward needing assistance, and they can't afford to be giving the public a feeling that they're being excessive in any way, shape or form."

Public relations appear to be on Immelt’s mind. “My compensation is never going to be an embarrassment to GE,” he said this month, noting also that his compensation would reflect financial performance. Immelt’s statements coincide with the fact that General Electric’s stock price is down, it has been forced to lay off employees recently and it may well need to lay off more this year, Guay points out.

GE investors and some employees have been hit hard, and “a perception that the CEO is not suffering through these times can make matters worse by breeding resentment and a belief that the top executives are being irresponsible or overly greedy,” Guay said in an interview today. This can happen even when top executives have been doing a very good job in difficult times; without Immelt’s leadership, GE may well have done much worse, Guay added.

“Contrary to popular opinion, most CEOs do not have an obsessive short-term focus that drives them to extract as much compensation as possible from their firm in as short a period of time as possible,” Guay said. The reason: CEOs can hold much of their wealth in company stock and expect to be at the helm for years. When the stock price falls, the CEO loses personal wealth apart from annual compensation, and the value of Immelt’s holdings declined by tens of millions of dollars last year. CEOs also know that if they do a good job during difficult times and forgo some compensation, the board may compensate them appropriately when times are better.

Immelt “will continue to earn performance-based units, which may be converted into GE stock in five years if the group achieves certain goals on its cash and stock return,” according the Financial Times. The report also notes that GE Capital took part in two federal programs aimed at loosening credit markets but did not try to sell equity to the government.

 For more insight into executive pay, see CEOs and Market Woes: Is Poor Corporate Governance to Blame?

GM and Chrysler are on Deadline to Submit Their Restructuring Plans Today

General Motors and Chrysler are on deadline today to submit to the U.S. Treasury their recovery plans, showing how they intend to restructure operations after receiving $17.4 billion in government aid. The Detroit auto companies have to present their reports to Treasury secretary Tim Geithner, White House economic advisor Larry Summers and others.

The details will be made public today, but some of the key elements of the auto companies’ plans are known. GM, for example, is expected to list plants that will close, models that will be discontinued, and other steps to return to profitability. That will hardly be easy. According to a Dow Jones report, GM has lost more than $70 billion on its operations since 2004. Moreover, any reorganization plan will need to involve a deal with the United Auto Workers union, but negotiations so far have failed to produce an agreement. Medical costs continue to be a major sticking point.

These problems are the cumulative result of strategic mistakes that the Detroit auto companies have made over several years, as Wharton management professors John Paul MacDuffie and Lawrence Hrebiniak explained in a Knowledge@Wharton podcast last October. According to MacDuffie, GM and other car companies have been “hit by more or less the equivalent of a perfect storm.” Just when the automakers were trying to brace themselves for a recovery plan that would lower labor, health care and pension costs, they were slammed by high oil prices and the credit crisis, which increased costs and reduced demand. Hrebiniak notes that the auto companies not only made strategic errors in failing to respond to global competition, but were also guilty of the “inability to manage their companies well.”

Whatever options the restructuring plans include, bankruptcy will not be among them – at least for today. “It’s not like an airline,” says MacDuffie. “We’ve seen airlines go into bankruptcy sometimes twice and come out, and still have customers. But I think the feeling is – no one’s really tested it – that with a car company, it would be very different.”

A ‘Painful Period’ Ahead for Japan’s Battered Economy

Japan’s Gross Domestic Product (GDP) shrank at an annual rate of 12.7% in the October-December period, the Japanese government reported today. Given that Japan “is the second biggest economy, it’s bad news, not just for Japan, but also for the rest of Asia and for the global economy overall,” says Wharton finance professor Franklin Allen. By way of comparison, the GDP of the U.S. and the euro zone dropped 3.8% and 1.2%, respectively, in the same quarter, according to news reports.

“It’s not a good scenario,” says Allen. “Japan has a trade-based economy to a large extent, and that is falling dramatically.” Moreover, “the country already has enormous amounts of public debt, so it’s difficult for them to have large stimuli to bring them out. And they have a political problem as well, with the current prime minister [Taro Aso] being exceptionally unpopular.” Altogether, Allen suggests, “it’s much worse than I thought.”

Indeed, GDP was expected to contract by only 11.6%. The 12.7% drop is just slightly smaller than the 13.1% decline registered by Japan in 1974 at the height of the oil crisis.

“One aspect of this is that there are very strong companies, like Toyota (see Knowledge@Wharton article), having big problems,” Allen adds, “although on the positive side, Japan has a very coherent, cohesive society and they will get through, but it is going to be very painful.”

Microsoft's Plan for Retail Stores Should Avoid Copying the Apple Model, Says Wharton Professor

The headline in today's Wall Street Journal, "Microsoft to Open Stores, Hires Retail Hand" was probably more to Microsoft's liking than the first sentence: "Microsoft Corp. said it hired a former Wal-Mart Stores Inc. executive to help the company open its own retail stores, a strategy shift that borrows from the playbook of rival Apple Inc." The last thing Microsoft should do as it moves forward with a plan to open its own stores is compare them to the Apple Stores, which have significantly boosted Apple's image and sales with their hip appeal, says Wharton marketing professor Peter S. Fader.

"They've been magic," Fader says of the Apple stores, with their modern minimalist design, well-trained sales staff and "genius bars" where customers can get technical advice. "But Apple is unique in its products and the way it markets them. It's not a good idea [for the Microsoft stores] to compare themselves to Apple. That would be the kiss of death."

It's not that Fader is opposed to Microsoft's strategy. "I'm amazed that they haven't done this sooner," he says. But the companies are "different beasts" and their stores should be, too. "They fulfill needs in different ways and with different products and approaches. You don’t want to see a Zune [Microsoft's MP3 player] front and center when you walk in. You don't want to send any signals that this is a 'me too,' Apple-like environment."

One of the biggest differences between the two tech giants is that Microsoft has no computers of its own to sell. Fader says it will be interesting to see how Microsoft decides which of the many hardware makers that run its software will appear in the stores.

A tougher challenge for Microsoft, he adds, is how the stores are viewed by its retail partners, especially the big box electronics stores such as Best Buy and CompUSA. Those stores have been struggling in the hobbled economy, and might not look kindly at new competition from one of their key suppliers. "It's one thing for Microsoft to open the stores and be mediocre," Fader says. "People will say, 'Hey, they tried.' But upsetting retail partners runs a deeper risk. There are ways they can manage that, but it is a risk."

Liberty Media Ponders an Investment in Struggling Sirius XM

The Wall Street Journal and The New York Times report that Liberty Media, owner of the DirectTV satellite television service, is considering an investment in struggling Sirius XM Radio, which has been fending off a bid by the owner of Dish Network. The discussions put the two U.S.-based satellite TV services in competition for America's only satellite radio service, which is said to be nearing bankruptcy.

Assuming one of the TV services gains control of Sirius XM, it will face a daunting challenge making its investment pay off. In a Knowledge@Wharton article last fall, Wharton faculty found plenty to worry about at Sirius XM, including the price Sirius paid to purchase rival XM network, its free-spending on big names such as Howard Stern, and the limits imposed by its market and technology.

Eventually, predicted Wharton marketing professor Jagmohan S. Raju, satellite radio will become just another channel on an integrated multimedia device. "XM was originally going to be just another band like AM and FM, and that still makes sense," says Raju. "What's needed is a seamless device that can cover everything."

 

Congress and the Administration Push Banks to Lend TARP Funds

This has been "light a fire week" in Washington. The CEOs of eight major U.S. banks were called before the House Finance Committee today to promise that they will use the money they get from the government's Troubled Asset Relief Program to extend credit and hopefully get the economy moving. The New York Times is live-blogging from the hearing, which committee chairman Barney Frank, a Massachusetts Democrat,  opened by telling the bankers: "I urge you going forward to be ungrudgingly cooperative." There has to be a sense among the American people, he said, "that you understand their anger … and that you're willing to make some sacrifices to get this working."

Treasury secretary Timothy Geithner's announcement yesterday of revisions to the TARP program did not offer enough details to satisfy Wall Street, which greeted the changes with a decline of nearly 5% in the Dow Jones Industrial Average. The index gained nearly 1% in morning trading today. The plan provides for tougher oversight that aims to force banks to get their balance sheets in order.

Wharton faculty have urged the government to get tougher with banks over their use of TARP funds. In a Knowledge@Wharton podcast, finance professor Jeremy J. Siegel said the banks were "sitting on" TARP funds. That podcast and a complete archive of Knowledge@Wharton's  coverage of the financial crisis can be found in the special report, "Wall Street's Day of Reckoning: What's Next?"

Cutting Jobs to Bolster Profits Is Bad for People and Companies

Steven Korman, fourth-generation head of privately held Korman Communities, which employs about 500 people at its long-term-stay hotel and apartment properties in the mid-Atlantic states, told The Philadelphia Inquirer today that he has heard enough about layoffs as a strategy for maintaining profits and share-values in hard times. According to The Inquirer, Korman spent about $16,000 to buy ads in that newspaper and in The New York Times urging corporations to "please keep your employees working."Korman told The Inquirer that he placed the ads after watching Pfizer CEO Jeff Kindler say on CNBC that the pharmaceutical firm would eliminate 8,000 jobs before its proposed merger with Wyeth. In the ads, Korman wrote, "I have listened to the executives of many companies say that they are eliminating thousands of jobs to 'improve the bottom line.' I own stock in many of these companies and would prefer that the companies make a smaller profit and [that] the stock fall, in the short term, rather than affect the lives of our neighbors and their families as jobs are lost."

Today, the newspaper says, Korman will send similarly themed letters to Kindler and the chief executives of 16 other corporations whose stock he owns. He writes in the letter: "If your company is making money and you cut these jobs, you are telling the world that you have no plans for future growth." That pitch may be a hard-sell on Wall Street, where horizons rarely exceed the next quarterly financial statement. But consider these comments in the current issue of Knowledge@Wharton from management professor Peter Cappelli, who heads the school’s Center for Human Resources: "At least in the U.S., companies don't seem to be thinking about much [about layoffs] beside the immediate impact. To some extent, this could be because of the pressure to manage operations to conform to quarterly performance expectations. It could also result from the fact that the negative effects of layoffs -- such as the long-term costs associated with hiring again in upturns; delays in getting performance back up; and morale [issues] -- are hard to track." Cappelli and others discussed alternatives to layoffs in another recent Knowledge@Wharton article.

Bill Amelio Talks Strategy before Departing as Lenovo CEO
During the World Economic Forum at Davos, which ended February 1, Wharton management professor Michael Useem interviewed Bill Amelio, then CEO of the Chinese computer maker Lenovo Group, about the company’s strategy for dealing with the current downturn in the computer industry and in global markets overall. On February 5, Lenovo announced that chairman Yang Yuanqing would replace Amelio as CEO, and that co-founder Liu Chuanzhi would become board chairman. Lenovo joins a list of other high-technology companies – including Apple and Dell -- whose founders have, at one point, stepped away from the CEO role, only to return to that position several years later during particularly challenging times in the industry. Amelio, who previously headed up Dell’s Asia-Pacific operations, was appointed CEO of Lenovo in 2005, shortly after the company acquired IBM’s personal computer business. Below is an edited version of the conversation with Amelio.

Read the Full Knowledge@Wharton Interview