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Posted 4/17/2003
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The Speculator
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The Speculator
Lords on the board are a royal pain
Stock in the 6 U.S. companies with nobility on
their boards fell an average of 44% during royal tenures. British business
lordships don't fare much better.
By Victor
Niederhoffer and Laurel Kenner
"He
said we ought to bow when we spoke to him, and say ‘Your Grace,’ or ‘My
Lord,’ or ‘Your Lordship’--- and one of us ought to wait on him at dinner,
and do any little thing for him he wanted done."
--Mark Twain, "Huckleberry Finn"
The spirit of
independence at the core of America’s character is at odds with the worship
of royalty. The Declaration of Independence declared that the right to
pursue happiness comes from the nature of man, not from the largesse of a
king. The U.S. Constitution bans titles of nobility for American citizens.
When George Washington was offered the job of king in the new republic, he
turned it down cold.
But U.S. corporations, Wall Street and the investing public have
succumbed to the all-too-human predisposition for servility. Obsequiousness
is pervasive -- not only toward titled foreign nobility, but toward their
modern equivalents, politicians and celebrities. The consequences go beyond
the sociological. Fortunately, awareness of this tendency can help
investors protect their portfolios.
Consider, for example, the six U.S.-listed companies that in the
first three years of this century had a member of the British House of
Lords on their board. Wouldn’t you know it? Two of these companies, Enron (ENRNQ,
news,
msgs)
and Tyco International (TYC,
news,
msgs),
turned out to be poster children for the decadence of American industry,
the misstatement of earnings and the abuse of corporate privilege. The
average performance in these six stocks of -44% seems a just reward for
this tendency. (We are not questioning the individual abilities or
integrity of any particular lord who serves on a board; doubtless they are
as able and honest as other board members. It’s merely that their presence
provides a signal that we find un-American and uneconomic.)
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Lords on U.S. boards
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|
Performance
year-end 1999 through present or until lord’s resignation
|
|
|
|
|
|
Company
|
Lord
|
Board tenure
|
Company performance
|
S&P 500 performance, same period
|
|
Enron (ENRNQ,
news,
msgs)
|
Lord John Wakeham
|
1994-Feb. 2002
|
-99%
|
-24%
|
|
Goldman Sachs (GS,
news,
msgs)
|
Lord Edmund John P. Browne
|
1999-present
|
-23%
|
-41%
|
|
Halliburton (HAL,
news,
msgs)
|
Lord Clitheroe
|
1987-May 2002
|
-6%
|
-24%
|
|
IBM (IBM,
news,
msgs)
|
Lord Alexander James Trotman
|
1994-present
|
-27%
|
-41%
|
|
Intel (INTC,
news,
msgs)
|
Lord Edmund John P. Browne
|
1997-present
|
-60%
|
-41%
|
|
Tyco (TYC,
news,
msgs)
|
Lord Michael Ashcroft
|
1998-Nov. 2002
|
-54%
|
-26%
|
|
Average performance
|
|
|
-44%
|
-33%
|
|
Note that three of the lords resigned in 2002, a banner year for U.S.
corporate scandals. Lords are notorious for leaving the sinking ship
shortly before the final dive. "The Communist Manifesto" points
to this tendency among the aristocrats before the French Revolution, and a
wholesale rebellion among the nobility took place just before the fall of
the Russian monarchy in 1916, entangled with the assassination of Rasputin.
Lord Michael Ashcroft, for example, joined Tyco’s board in 1998 but
resigned in November 2002, when the company was beset with revelations of
improper accounting. “I have been a vocal and persistent advocate of the
wholesale replacement of the current board as the preferred option,” he
explained. “Consistent with that lead, I should set the example by being
the first to stand down.” And so he did -- but not before selling some $30
million in Tyco stock.
In a touch at once Enronesque and noble, Enron announced in February
2002 that Lord John Wakeham, a director since 1994, would resign as he was
“required to travel great distances to attend board meetings.” (The press
release also noted that Enron “believes its existing equity does not and
will not have value.”) Lord Wakeham had accepted a seat on Enron’s board for
$6,000 a month after personally approving Enron’s plan to build Europe’s
first gas-fired power station, according to Andrew Rawnsley in a Feb. 3,
2002, article in The Observer.
Might we suggest that it might be good for investors to watch
departures of the highborn carefully in the future to see which way the
wind is blowing?
We are sure that each of these companies would say that they named
these lords to their boards not out of deference or unseemly thirst for
status, but purely because of their lordly abilities. Six companies are not
enough for a foxhunt or a statistical study. But their dismal performance
confirms one preliminary impression: Those companies that seek reflected
un-American glory by naming a lord to the board in defiance of the spirit
of our roots show a deservedly dismal performance.
U.S. companies continue to invite lords to the party. Lord Charles
David Powell became a director of Caterpillar (CAT,
news,
msgs)
in January 2001, and of Textron (TXT,
news,
msgs)
the following month. Caterpillar is up 15% since then. But despite a record
as a foreign affairs and defense adviser to Margaret Thatcher and John
Major, Lord Powell has not been able to keep Textron from declining 43%.
Similarly, J.P. Morgan’s appointment of the Rt. Hon. Lord Robin W. Renwick
as vice chairman of J.P. Morgan Europe in January 2001 did not prevent a
48% decline in the value of its stock, vs. 33% for the S&P 500 ($INX).
Noble in name only?
The marketing success of products such as Royal Crown Cola, Royal
Velvet towels and Royal Dalton china indicates that Americans are suckers
for the high-sounding name. Even the most cynical American shopper is likely
to pay up for the umbrella or mattress of a manufacturer privileged to put
“official supplier to HRH” on the label.
Nowhere are the comic aspects of the tendency more evident than in
the advantage taken by marketers. U.S. companies in businesses ranging from
vacuum cleaners to golf clubs affect the word “royal” in their names. Here
are a few:
- Royal
Appliance Manufacturing (RAM,
news,
msgs);
makes Dirt Devils
- Royal
Bancshares of Pennsylvania (RBPAA,
news,
msgs):
holding company
- Royal
Palm Beach Colon (RPAML,
news,
msgs):
real estate
- Royal
Caribbean Cruises (RCL,
news,
msgs):
cruises
- Royal
Acceptance (RYFC,
news,
msgs):
auto leasing
- Royal
Bodycare (ROBE,
news,
msgs):
vitamins, weight control, skin care.
- Royal
Equity Exchange: infusion therapy home services
- Royal
Olympic Cruise Lines (ROCLF,
news,
msgs):
cruises
- Royal
Holdings Services (RHSL,
news,
msgs):
Currently has no assets, liabilities, or operations.
- Royale
Energy (ROYL,
news,
msgs):
oil and gas
Nobility
Homes (NOBH,
news,
msgs)
presumably gave itself that escutcheon because its mobile homes are of such
a high quality that a noble himself might wish to dwell there (or, we might
add, at least proffer them for use by estate serfs.) Sad to report,
Nobility’s stock peaked at $25 in July 1998 and trades at $8.40 today -- a
performance in line with Lords on Board companies.
In passing, we note that Noble (NE,
news,
msgs)
was named for co-founder Lloyd Noble. Barnes & Noble (BKS,
news,
msgs)
has similar origins.
The servile nature lurking in the American heart is nowhere better
illustrated than in the relation of the investing public to the chairman of
the Federal Reserve Board. A word from Alan Greenspan can make or break the
stock market, just as a wave of Louis XIV’s hand could signal fortune or exile
to his craven courtiers. Our book, "Practical Speculation," in
addition to detailing a study on board lords and manifestations of hubris,
makes the case that the chairman’s “irrational exuberance” speech in
December 1996 was the start of the dismal decline that has engulfed the
market from the beginning of the new century.
‘Spurn not the nobly born’
The English believe the nobility are necessary to maintain the
stability and dignity of society. G.K. Chesterton wrote: “The English lower
classes do not fear the English upper classes in the least; nobody could.
They simply and freely and sentimentally worship them.”
Dun & Bradstreet, a U.S. financial information firm, turned this
soft spot in the British heart to its advantage when it was having trouble
cracking the U.K. market. At first, British corporations refused to turn
over information pertaining to credit; but when the firm hired lords to
make the calls -- “Lord Chancellor Terwilliger here for D&B. Would you
kindly report your solvency and payments status?” -- the problems were
resolved.
Titles can be bought nowadays over the Internet, valued even without
the accompanying rents. Old-school Americans, however, see titles and
“noble blood” as medieval nonsense and believe that modesty precludes anyone
of merit from accepting such a designation. This is embodied in the U.S.
Constitution, Article I, Section 9, Clause 8:
No Title of
Nobility shall be granted by the United States: And no Person holding any
Office of Profit or Trust under them, shall, without the Consent of the
Congress, accept of any present, Emolument, Office, or Title, of any kind
whatever, from any King, Prince, or foreign State.
Few U.S. companies actively cloak themselves in a
noble air, as most know that the easiest road to wealth here is to produce
goods for the masses. The fortunes of Ford, Rockefeller, Gates and Procter
prove that. The big successes turn out to be companies like Costco (COST,
news,
msgs),
which lets customers pack their own purchases straight from warehouse
shelves and contents itself with a 10% gross margin.
Yet many American companies have politicians, the modern equivalent
of nobility, on their boards. We found that two-thirds of S&P 100
companies have at least one ex-politician on the board, be it a former
cabinet officer, a once-powerful member of Congress or a former agency
head. Ford Motor (F,
news,
msgs),
for example, counts Robert Rubin, the former U.S. Treasury Secretary, among
its directors along with a pair of British knights. Citicorp (C,
news,
msgs)
has Rubin along with a former CIA director and former U.S. president Gerald
Ford.
Henry Kissinger, the famous former secretary of state, has served on
the boards of Freeport-McMoRan Copper & Gold (FCX,
news,
msgs),
Revlon (REV,
news,
msgs),
Gulfstream Aerospace, American Express (AXP,
news,
msgs)
and CBS. He has so many other pots boiling that he resigned as chairman of
the commission investigating the Sept. 11, 2001, terror attacks rather than
disclose the clientele of his consulting firm.
In the post-Enron world, board memberships aren’t nearly so
attractive. Directors are actually supposed to supervise and even be
financially literate, at least if they sit on the audit committee. The
Washington Post reported in a March 9 article that Washington power broker
Dick Armey turned down several offers on leaving public life. Contrast this
with the situation in early 2000, when stock options lured hordes of
politicians to join the boards of Internet companies.
Today, it’s much safer for the politicians -- the American nobility
-- to distance themselves from the filthy race for profits.
The British record
Perhaps lords do better on British boards? Regrettably, not so.
Eleven companies in the FTSE 100 Index ($FTSE)
have lords as officers or directors. Three of these -- British Petroleum, Abbey
National (ANB-A,
news,
msgs)
and Pearson (PSO,
news,
msgs)
-- have lords as chairman or CEO. Their performance regrettably parallels
the performance of U.S. companies with lords aboard, with returns since
year-end 2001 of -93%, -58% and -34% respectively The average performance
of -38% compares unfavorably with the 27% decline in the FTSE 100 during the
same time period -- a mediocre showing that supports the growing view in
England that times are changing and that placing someone on the board
because “He’s a jolly good fellow and went to Eton” will no longer be the
answer.
We have come a long way in history since the time of Caligula,
emperor of Rome from 12-41 A.D., when royals were thought to be gods.
Royals are no longer allowed to torture and kill whomever they wish. They
even have to pay taxes and debts. And yet investors would nevertheless do well
to maintain a healthy distance between their wallets and companies that
maintain a noble aura.
Final note
Our Web site
has tables showing the performance of British companies with lords on the
board, as well as a list of U.S. companies that have politicians as
directors.
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