A Smelly Warhol?

BOND No. 9, a high-class maker of New York City-centric luxury fragrances, just announced the introduction of “Andy Warhol Silver Factory”, the newest addition to its line of fragrances. Significantly, the Andy Warhol Foundation licenses Andy Warhol Silver Factory.

 

For those of you old enough to have been in the same room with Andy, the association with a fragrance might seem a bit odd. But licensing provides cash, and the Foundation has surely become associated with cash. As the owner of a very significant inventory of Warhol works, and holder of the authentication “key”, the Foundation played a very significant, at times controversial, role in the contemporary market for Warhol works. But now, with the foundation’s inventory very significantly diminished by the rapid rate at which it has been selling works in the past several years, fragrance may prove to be the new “pop” for the foundation.

 

From the point of view of Bond No.9 and its brilliant creator, Laurice Rahme, the marriage is very clever. Warhol is hot, it’s the party season, and most people associate the Pittsburgh born artist with New York City. People seem to be willing to pay big bucks for anything bearing Warhol’s name, so why not a luxury, high priced fragrance?

 

The more interesting question is “what does this marriage presage for the Warhol art market? The foundation played a very active role in the market for Warhol works: it sold works, mostly to dealers and top tier collectors, authenticated works, and influenced the channels of distribution, by decreeing who could buy directly from the foundation and in some cases who could buy from those who bought from the foundation. For a time, hardly any Warhol work of significance could change hands without some Foundation involvement.

 

Any reduction of the Foundation’s role will likely benefit the art market, the dealer community and collectors because the market will behave more freely and competitively. The Warhol market might even acknowledge the importance of scholarship and curatorial insight. Even collectors like Jose Mugrabi, who claims to own in excess of 800 original Warhols, don’t combine their ownership with the power to authenticate works. Consequently, these two sources of power will be diffused among more players.

 

Many art world denizens have long regarded the Warhol Foundation to be far more concerned with the commerce in art than with Warhol’s place in art history. Now that the Foundation has partnered in the launch of a Warhol fragrance, one can say that they have indeed learned something from Andy and have taken his commercialism to heart. Hopefully, the void created by the Foundation’s now open commercial focus will be filled by serious art scholars, critics, and collectors so that we can all get a more balanced appraisal of Warhol, the artist.

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Letter from a Very Good and Wise Friend

Just received this letter from my friend, Anne McBride, and want to share it with you:

November 19, 2007

Dear Clients and Friends,

Headlines from a recent single day (November 9, 2007) in The Wall Street Journal demonstrate the extraordinary turmoil and critical issues the world financial markets face:

 

"Two Weeks that Shook the Titans of Wall Street"

"Why Fed Expects Growth to Slow"

"Why Europe Isn't Lifting Rates"

"Lifelines for the Drowning Dollar"

 

A quick glance at these headlines indicates that much of the bad news emanate from the United States.  Problems in the subprime market have rocked the U.S. financial markets. Significant, and in some cases, massive subprime mortgage related write-downs and losses have taken a toll on many of the well-known U.S. banks.

 

On October 24th, Merrill Lynch announced that third quarter losses on investments connected to subprime mortgages would be $8.4 billion, up from a previous estimate of $5 billion. 6 days later, Merrill Lynch CEO Stanley O'Neal resigned. ("Two Weeks that Shook the Titans of Wall Street" Wall Street Journal, November 9, 2007) Citigroup warned of perhaps $11 billion of additional write-downs on subprime mortgages and related securities on November 4th. ($6 billion-plus of charges had already been reported for the third quarter). Charles Prince, Citigroup's CEO, resigned. ("Citigroup's Prince Steps Down, Rubin Named Chairman, Bloomberg  November 4, 2007)

 

The banks affected are not only U.S. headquartered banks.  Sanford Bernstein & Company analysts wrote that Barclays and Royal Bank of Scotland might write down $4.4 billion in the second half due to the breakdown in the market for credit-related securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).

 

"The financial markets are worried about further possible large writeoffs related to subprime defaults and the fear that excessive losses could lead to a very dramatic seizing up in credit, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. ("U.S. Three-Month Bill Yields Tumble as Subprime Concern Rises" Bloomberg November 9, 2007).

 

The U.S. dollar has been extremely weak recently. On Friday the 9th, Reuters reported that the dollar fell to a "26-year low against sterling and a record low against the euro as expectations grew for more interest rate cuts from the U.S. Federal Reserve."  The weakness of the dollar is a partial reason for the recent jump in oil prices. On November 7, oil touched an intraday high slightly above $98. It has since pulled back but remains above $90.

In mid-October, the International Monetary Fund forecast a slowing in 2008 world economic growth "with recent turbulence in financial markets triggered by the fallout from the U.S. subprime mortgage market clouding prospects." The European Central Bank is putting off taking any interest rate actions in the face of "surging" currencies, high oil prices and market turmoil. Euro-area firms are complaining about the euro's strength making their exports more expensive. ("Why Europe Isn't Lifting Rates" Wall Street Journal November 9, 2007) A weakening U.S. economy hurts the growth prospects of countries like Mexico which exports a high percentage of their goods to the United States.

 

Certainly investors have to guard against possible further deterioration in world financial markets and economies. It is possible that investors may increasingly gravitate to what they perceive as extremely safe investments and asset allocations. Yet, the broad-based turbulence in financial markets could represent an opportunity for publicly traded non-U.S. companies, especially in emerging markets.

 

The IMF notes that the major emerging markets have become the primary drivers of global growth. "For the first time, China and India are making the largest country-level contributions to global growth." The Financial Times notes that many emerging economies are in "far better shape than ever before to weather broader financial turmoil." Many emerging market economies benefit from the strength in commodities while a number of emerging market governments have strengthened their resistance to global financial turmoil. "The improvements in their economies have attracted a more diverse group of investors - including pension funds, central banks and local investors which analysts say are increasingly investing for the long term."

 

Additionally, David Malpass of Bear Stearns notes that a weakening dollar has an upside for international equities and emerging market economies. "The weaker the dollar in recent years, the more quickly capital has flowed out -to emerging markets, commodities and foreign real estate." ("Lifelines for the Drowning Dollar" Wall Street Journal, November 9, 2007).

 

Emerging market companies are benefiting from strong earnings growth. Earnings at Chinese companies traded in Hong Kong are expected to increase about 34% this year, according to Morgan Stanley. Morgan Stanley also believes that Brazilian companies will increase profits approximately 31 percent, Indian companies should grow about 29% and Russian companies about 17%. William Fries of Thornburg Investment Management points out "there seems to be plenty of capital in the world for companies that are growing." ("BRIC's big potential; Brazil, Russia, India, China indexes post exponential gains" Bloomberg News November 7, 2007).

 

Christian Deseglise, head of emerging markets at HSBC Investments, states, "What has changed is investor perception of emerging markets. The fact that emerging markets may be less of a source of risk than the developed markets is increasingly being recognized by investors." ("In for the long haul? Why a boom is under way in emerging markets, Financial Times, October 18, 2007)  

 

To be sure, the picture in our economic/financial market crystal ball is cloudy. For example, it's not clear what will happen if the United States economy weakens even more than current forecasts. A severe global liquidity crunch would create few safe havens. Also, some investors worry about a stock market bubble in China and India.

 

Nevertheless, non-U.S. public companies should consider taking a more global approach to their investment outreach. Developed Asian financial markets such as Singapore and Hong Kong or markets benefiting from the commodity boom such as Dubai should be considered for outreach.  

 

Further, U.S. investors are interested and may become even more interested in international equities. Last year, the Wall Street Journal noted that a number of domestically focused U.S. mutual funds are holding a surprising percentage of foreign stocks. ADR volume has been extremely strong. The Bank of New York Mellon reported on October 23rd that depositary receipt DR trading value (for American and global depositary receipts) exceeded $2 trillion for the first time ever.  DR trading value increased 53 percent versus the same period in 2006. "A record 53.1 billion U.S.-listed DRs, valued at $1.872 trillion traded on U.S. exchanges during the first nine months of 2007."  

 

Slow U.S economic growth and a weak dollar very well could encourage additional U.S. investment in international equities. Non-U.S. companies should look for opportunities in less obvious places in the U.S. such as certain domestically oriented fund managers or sophisticated retail investors.  

 

Best regards,

 

Anne McBride

Vice Chairman, Global Investor Relations & Financial Communications

theglobalconsultingroup

STRATEGIC FINANCIAL AND CORPORATE COMMUNICATIONS

 

22 Cortlandt Street

New York, New York 10007

T: 646-284-9431 | F: 646-284-9485 | E: amcbride@hfgcg.com

www.hfgcg.com

 

 

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Family Business: Outsiders Bringing Insiders In

Rarely, if ever, does one find a successful family business that is managed exclusively by family members. Non-family, professional managers have either contributed to building the business or are required to maintain or grow the business that the family has founded. Why should a talented manager elect to join a family business? And if he does, how should he prepare himself to navigate the dual –family and business- systems, which drive the business.

There are two common scenarios in which a professional manager will confront the family system while managing his business. He may join a business and work for the founders and contribute to its success, or he may join the family business in which the founder would like to bring his family.

In either situation, the professional manager will be challenged to understand how and business operates when it is oriented both towards profitability and the implementation of a family succession plan. To do so, the professional manager should develop a transparent relationship with the founder. He should elicit from the founder the details of his family and business plan, and he should disclose his career objectives.

To be effective, the manager needs to understand whether the founder envisions bringing his son or daughter up through the ranks or has he already made place in the executive suite, whether he has decided that his son will succeed him in all events or is he committed to testing the son’s skills, drive and desire to succeed? And, then he should develop an understanding of what career path the founder envisions for him.  Through all of this, the manager must maintain his strategy of developing a trusting relationship with the founder, and to articulate to the founder that he understands and is committed to assisting him realize his business and family goals.

Concurrent with solidifying his relationship with the founder, the professional manager should have a strategy to further his own interests. Why is he taking on this job? What are his goals? The least desirable objective is to chase equity. Minority ownership in a family business is difficult to obtain and probably worthless when obtained.

Instead, the professional manager is better served by focusing on current compensation, phantom equity, bonus and other incentive arrangements and an exit package. He should take the lead to identify benchmarks to measure his success in assisting the founder and his son. For example, if the son requires mentoring, the professional manager might negotiate an arrangement in which he is awarded bonuses based upon the son’s achieving certain predetermined benchmarks. Each time a pre-determined benchmark is achieved by the son, the professional manager might earn phantom equity, or a cash bonus.

The professional manager should also partner with the son assist him to advance. He is the one who has worked with the father; he knows his work temperament, his style of management, and can be of great assistance to the incoming son. The key to enabling this partnering is that the professional make clear to the son that he is fully aware of the family objectives and that he considers it his job to contribute to a successful succession. He should not permit himself to be positioned as an obstacle to the succession; he is an enabler.

The independent board, committee and advisory board are very useful to the manager. He will be continuously judged (and rewarded) for his ability to reach very subjective benchmarks and he should require that these judgments be made by neutral, independent, arbiters. The manager should play a proactive role in determining the composition of these bodies; he should discourage the use of family retainers and push for selecting professionals and business people who are financially independent of the family

The professional manager’s alliances with the founder and the son, and the family’s and professional manager’s abilities to cooperatively map mutually dependent career paths are critical to the professional manager's success.  Transparency in the business environment, in disclosing the family plan, in articulating the professional's career objectives, and in the principals’ ability to navigate sometimes “touchy” subjects are critical to everyone's success.

 

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eBay and Trademarked Goods

On November 14, 2007, the Wall Street Journal ran an article describing the beginning of a long-anticipated trial, being litigated in the Southern District Federal court, in which Tiffany & Co. is claiming very substantial damages from eBay. Tiffany alleges that eBay bears responsibility to regulate the sale of counterfeit Tiffany branded products on it site. Other prominent trademark holders have filed similar actions against eBay. It seems that while these two goliaths wage their war, the public interest in maintaining a fair and informed market place on the Internet might be neglected.

A much simpler solution than the broken system now in place between eBay and trademark holders would be to simply require those who wish to sell trademarked goods on eBay to register with eBay, as sellers of trademarked goods, and to provide a verifiable identity and (terrestrial) address.

Generally, our legal system works when there is in place a system of meaningful checks and balances. To maintain this equilibrium, the trademark holder is given a legal monopoly over the use of its rights and the person who might be affected by the assertion of those rights has the right to protect himself from abusive enforcement behavior. He has the rights to review any assertion of illegality, is provided with the opportunity to answer claims and is given the right to seek compensation if the rights holder acts abusively. When the legal system grants a legal monopoly, like a trademark, to a party, it does so cautiously, and generally imposes responsibilities on the monopoly holder designed to safeguard the public interest. In the area of trademarks, these responsibilities include a duty to protect one’s trademark, to maintain its distinctiveness and to enforce the trademark against those who infringe it. But there is no right given to the trademark holder to interfere with the lawful sale or resale of products bearing its mark.

In the terrestrial world, trademark holders police the use of their marks. When confronted with suspicious activity, the trademark holder traditionally begins enforcement by sending a notice to the infringer, a demand that the activity be stopped. He may sue for infringement and damages, and in certain circumstance he may resort to extraordinary measures like injunctive relief, to prevent a sale, or to the seizure of the counterfeit or gray market goods. When the law provides for extraordinary measures, it attempts to level the playing field by requiring that a bond be posted. This is designed to protect the targeted party and to induce the trademark holder to act responsibly.  In all instances, the trademark holder acts at his peril; if he mistakenly seizes legitimate goods, or erroneously closes a selling establishment, he bears responsibility for the financial consequences of his actions.

On the Internet, this equilibrium is threatened by the broken system now in place with online auction sites like eBay and the trademark holders. EBay’s existing policy is to remove specific listings when it is notified by a trademark holder that the listing violates trademark law. There is no requirement that the holder establish that his claim is valid or even that it is likely to be upheld by a court.

Tiffany and other trademark holders, engaged in similar lawsuits, are seeking to deputize Ebay to become their trademark rights enforcer. They would like eBay to act even more aggressively to independently remove trademarked items that are offered for sale, whether or not the trademark holder calls these listings to eBay’s attention. In effect, the trademark holders would like to eliminate all of the usual checks and balances, which protect the public, and assume the position of judge and enforcer by deputizing eBay to do their enforcement work.

Where is the public interest in this scheme? Is it reasonable to assume that an individual eBay seller will pursue his remedies against abusive trademark enforcement through the legal system? Given the global nature of the Internet, an eBay seller in New York might be faced with challenging the actions of a trademark holder in Europe or Asia in order to re-list his items or sell similar items on eBay in the future. This is not very likely to occur. And, the trademark holder may unwittingly alienate its loyal customers, some of whom may have purchased the trademarked goods, relying on the owners promises that they are worth more, eventually become collectibles, and ultimately hold or increase their value. EBay  looses potential revenues by reducing the volume of legitimate sales. So, no one really benefits from this regime.

It would be simpler and more in keeping with existing trademark law and practices if eBay would institute a registration procedure through which a seller who desires to offer trademarked goods for sale on the site, would be required to register with eBay. The seller would provide a verifiable address and identification. With this simple procedure, the trademark holder would be left to police potential sales over the Internet in the same manner it now does in the terrestrial world: it would be charged with implementing a monitoring and enforcement program to detect suspicious activity and to enforce its rights against those violating the law.

If the suspicious activity occurred on the Internet, the rights holder could either obtain the identity from eBay or eBay could contact the seller on behalf of the rights holder and make the normal demands. All parties would be left with their traditional legal remedies in tact. And, equally important, the public, in this case the eBay seller, would have the opportunity to meaningfully defend itself against inaccurate claims by the rights holder. Each party, eBay, the trademark holder and the public seller would have protections and remedies that are consistent with the economic consequences of their activity and therefor likely to be pursued.

 

 

 

 

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Family Business: The View Outside, In

You don’t have to be a New York Yankees fan to conclude that passing the torch to the younger generation in the family business can be treacherous. But receiving the baton in this inter-generational relay race is no easy matter, either. Who bears the responsibility to make this work?

The incoming family member bears the primary responsibility to devise and implement the strategy to succeed in ascending to the leadership of his family business. He or she should not rely upon the assumption that his family, the senior management, has learned all there is to know and is capable of insuring a successful transition.

Generally, there are three key players in the typical family business succession scenario: the incumbent parent generation; the non-family member key employee, and the incoming, younger family member. The incumbent member wants to transition management and, possibly, ownership of the enterprise; the younger member has been racing to be ready and is eager to receive the handoff; and the non-family member is work horse, reliable member of the team, often unnoticed, who is critical to the success in this transaction.

The younger family member should be clear that while being a family member may be a necessary condition to her reaching the executive suite, it is not a sufficient condition. He must clearly understand that he is entering a business, not an extension of the family. He will be expected to perform to higher standards than, and often different from, those by which the non-family management team has been tested. He will need to establish his own credentials.

Scorched earth strategies, thinking that the transition of management to the younger generation is an opportunity for wholesale replacement of key personnel and the implementation of radically different strategies, are not productive. Drastic upheavals in a successful business should be very carefully considered and generally, avoided. Unlike a non-family business where the appointment of a new executive team is often an opportunity to clean house and lay the blame for the businesses problems on prior management, this approach may have deep and very negative consequences for the family business. The phrase, “it’s not personal, just business”, does not apply to the dynamics of family businesses. 

The younger family member should learn the business, learn to recognize the valuable roles played by the non-family members, and learn to demonstrate his leadership skills. His ingoing assumption should be since the business is successful, those in leadership roles are valuable team members; he should work with them, not against them.

Before joining the business, the younger family member might do well to spend some working time for another business. Family businesses, particularly successful ones, can be very insular and, learning how things are done elsewhere will significantly contribute to the potential leaders’ knowledge base, materially improve their network of useful contacts, and provide opportunities to make mistakes and elevate their credentials. Having achieved a degree of success and recognition in a non-family business is a valuable asset when navigating the family business environment.

Both before joining the family business and regularly thereafter, the younger member should also have extended, candid and extensive explorative conversations concerning the job, the career, the expectations and time line with their parent. The traditional executive interview process, through which as much is learned by the executive about the business as is learned by the business about the candidate is conspicuously absent from the process through which family members are enticed to join the business.

Lastly, like any executive being recruited to a new high-level position, these potential leaders should conduct their own due diligence on the business, its key players and business strategy. These are not contractual discussions; they do not have to result in agreements. They are exploratory discussions, aimed at gathering information, sharing views and helping to determine which values are shared by the generations and which will have to be reconciled in the future. They might include a discussion to air the senior member’s mid to long-term plans for his continued relationship with the business.

The younger, incoming executive should also develop a realistic understanding of how his entry will impact key employees: who will be welcoming, who will they feel threatened, who will they likely be supportive and who will they be inclined to undercut his initial integration. Equally important, the younger member should begin to develop strategies to identify indispensable players and how to gain their support and build alliances

The senior family member needs also to recognize that his business is not a family unit, that he has succeeded by recognizing talent and contribution and by promoting the most accomplished of his employees, not by nurturing those who couldn’t cut it. As the person of authority and last resort in the family business, he or she has an important responsibility to create an transparent atmosphere in the business, one in which his trusted and valuable employees understand his business and family plans and the roles which they will play in implementing these strategies. Usually, if key non-family employees are informed and properly motivated to implement the family strategy within the business, they will understand that cooperation is in their best interests and will be rewarded.

By doing his homework, by planning his entry into “his” business, the younger family member is doing his part to partner with his senior family members; he is fulfilling his responsibility to make the transition successful. It is not a guaranty of immediate success in integrating him into the business. But it certainly increases the likelihood that the incoming family member will be better prepared for the challenges he will encounter, will be smarter in choosing battles worth waging, and ultimately will be more likely to navigate a successful transition.

Although there has been considerable scholarship addressing the challenges facing the incumbent family members when bringing the younger generation into the leadership of the family business, very little attention has been focused on the younger generation. Little help has been offered to these future family business leaders. Many of them enter this race unprepared, too often not understanding the challenges they will face, the alliances they will need, or how to devise the strategies that will help them to succeed as they work to earn their place in the family enterprise. Consequently, they often participate passively in shaping their careers and rely on their parents to create successful career paths for them.

 

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