News today was that Herb Kelleher is stepping down as Chairman of Southwest Airline after 31 years. He will still, at the age of 77, continue to be an employee of the airline, drawing a salary of $400,000 through 2013. Now, I think very highly of Mr. Kelleher, but I wondered just what he was doing to earn this salary that puts him way, way above the average American. The news paper said that his employment contract did not “state his duties.” There is a sense here that Mr. Kelleher and his friends “own” the airline and that whatever they decide is fine. Whatever happened to the notion that the shareholders own the company? If we had a real vote of the shareholders, would they not want to know what his duties were to earn this magnificent salary? What we teach about shareholders being owners is just so far removed from reality that our teaching is almost a lie. The modern corporation is controlled by its managers who allow investors to share in the wealth that they generate. this is just the opposite of what we teach.
Much has been written recently about how the reward system for bankers has created the problems that we are facing now. I shall have more to say on this topic but for starters here are some excellent links.
Herb Greenberg has retired from journalism after 34 years and left these five excellent lessons for investors.
- The numbers don’t lie.
- Quality, not quantity.
- GAAP isn’t the same as a Good Housekeeping seal.
- Don’t confuse stocks with companies.
- Risk isn’t a four-letter word
What am I missing? There seems to be a great deal of unnecessary confusion about marking to market in the financial press. The rules state specifically that fair value is the sale value of an asset in an orderly market. It does not say that it is the liquidation value when markets are disorderly, as they are at present, or nonexistent in some cases. The FASB provides full guidance in SFAS 157 on what to do in these cases and it does not include writing assets down to zero. So, why all the criticism?
Peter J. Wallison, (“Judgment too important to be left to the accountants,” Financial Times, May 1, 2008) raises doubts about fair value measurement without ever telling his readers just what he understands by the term. SFAS 157 provides a wide range of possible ways of measuring fair value that contradicts the “one-size-fits-all” charge. He is right that a “wooden application of fair value” does a disservice to investors but that does not make an intelligent application a disservice, Does it make sense to write down a performing asset in a non-liquid market? Of course not, but the standard never suggested that it should. In particular, the standard attempts to arrive at an external measure of value in use if that is the highest and best use of that asset. Let’s be fair to the notion and use the notion correctly so that it becomes a good guide to the market. For the full article see Wallison