Topic:The Government and the Economy
Stemberg: I’m Tom Stemberg. I’m the Managing General Partner of the Highland Consumer Fund.
Question: Will President Obama be good or bad for business?
Stemberg: President Obama inherited an incredibly challenging situation. So he has not dealt an easy hand. I think, in the jury in many ways are still out as to what they’re doing. On the positive side, I think President Obama is in still a degree of confidence in the part of the American consumer as well as in part of foreign… foreigners looking in America, what America stands for. I think he’s creating a far more positive atmosphere. My relatives in Europe, who were just really down to United States, now feel much better about us and our products than they did a year ago. So that’s a positive. My concerns are… That is leaving lots of things in the hands of a democratic congress. And in some cases, particularly motivated by their large contributors from [IB] and the unions. They’re going to do a lot of things that are really dumb, whether they’re… creating crazy tax structures, that eliminate the desire for entrepreneurs to go take the risk. We’d like to see them take… create the next Apple or the next Intel or the next Staples. Whether it’s these union cards, sign up nonsense, which is disgraceful. The notion that you can’t have a secret election decided, whether a workforce needs a union or not, that you can somehow take some guys to bargain a Santa card and end up with the union, with a government that arbitrates a contract, this is just insane. And so, I worry a great deal about that, that… in the process of building a nation, we’re going to build France instead of the United States.
Question: Will we see massive changes to internal corporate regulations?
Stemberg: I think there’s a totally different environment on executive comp. I’ve been fortunate to be involved in companies that are generally speaking, extremely entrepreneurial, don’t give a whole lot of perks, in some cases, virtually no perks. It’s funny. The PetSmart… tables disclosing all your benefits. And we just… We love listing it ‘cause we would… do not offer, do not offer, do not offer, do not offer, country club, no, executive jet time, no, etcetera. So we like it. But the same time, you’ve, now, got restrictions on your ability to offer equity ‘cause the formula that people throughout you don’t build in to the fact that you’re not doing a lot of other things. And you like to compensate by giving greater stock awards. And you’re constrained by… what the delusion percentage is versus your peer group and all kinds of other metrics. Some of which are good and some of which are just not appropriate. And it’s… And secondarily, it’s… Think about trying at the end of the 2008, say, the bonus targets for your Chief Executive Officer of 2009, how do you do it? What economic assumptions do you make? And how can you possibly be fair? If you have assume a doomsday scenario and heaven forbid things turn out all right, you pay 300% bonuses you’re going to be criticized. If you set aggressive goals and the economy remains lousier, it gets even worse, you’ll probably… third in a row and nobody’s earned a bonus and you can lose employees, how do you deal with that? It’s incredibly hard.
Question: Will companies evaluate risk differently in this regulatory environment?
Stemberg: I don’t think government does many things well. One thing, I think, that the Obama administration did very, very well is the phrase they use of stress test. And it’s kind of like when you go for your check-up and they check out your heart, they put you on a treadmill and get you going for awhile and raise your heart rate and see how your heart response. Well, what each of the companies we’ve been talking about has done is run through very negative scenarios in terms of stress test, negative in terms of revenues, negative in terms of gross margin pressures, and said to themselves, can I survive that scenario? And once they’ve subject themselves to that stress test and they know they can get through that, then they know that they’re at least going to survive. And as soon as things stabilized, they can, then, pounce.
Question: Should the government more closely regulate hedge funds?
Stemberg: Regulating hedge funds or at least getting transparency is a good thing. I’m not a Wall Street expert but I don’t think there’s any question that something was going on on Wall Street was simply market manipulation by large hedge funds. And I think, you know, we need to have transparency into that and… You know, hedge funds are… It’s a broad brass to describe some great people, fundamental stock pickers, and long-term holders to some real people in the vast money business so, you know, create a lot of havoc. So I think the greater transparency actually… in regulation is a smart thing and a good thing. What I worry about, along with that, is we’re going to get into over regulation and craziness. So the notion that the government is [IB] trust company, they can’t entertain their clients at a golf tournament, to me, is ridiculous. Or the notion that a bank like Wells Fargo can’t take its highest performers to Las Vegas for a weekend without being tarred and feathered in the Wall Street Journal in USA Today is just flat out wrong.
Question: What was a major business obstacle you overcame?
Stemberg: The biggest obstacle I’ve probably had overcome in my business career is when the Federal Government threatened me. At Staples, we, back in the late ‘90s, agreed to acquire our largest competitor, Office Depot. They’re actually bigger than we were at the time. And at first, they’re going to acquire us. They ran a hard times, end up us acquiring them. And the deal made a lot of sense in retrospect. If we’re going to rewrite history, all the things we said to the Federal Trade Commission what would happen, in fact, did happen. The internet level prices. Wal-Mart became a huge competitor. But at the time, they didn’t see those things and we lost. And on a Monday, we heard from the Federal Trade Commission that they’re going to get a junction against our merging. And we go to court. But it’d be months and months or if not years to overcome that and the merger by Office Deport desired died. And there were lots of… lots of temptation to say, if only and could or would should etcetera. And that resolved in a week, prior that. That no matter what happen… I wrote 2 speeches. One is whenever everything goes well. And the second was whatever it doesn’t happen. And that day, it didn’t happen. I went out there and people, okay, folks, this is over. We always done old co and new co plans. Meaning old co… meaning if we couldn’t do the merger. Old co plans are in, let’s move forward and I don’t want to hear a word about the failed merger ever. It’s ground for termination. We’re not going to look back. We’re going to look forward. And in fact, out of that time period, Staples took on a huge spurt of growth. In fact, a couple of years later, passed over Staples’ revenues. And now, Staples market capitalization dwarfs that of Office Depot.