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CEO Daily: Friday, 23rd June

June 23, 2017, 12:11 PM UTC

Good morning,

Today we’re publishing online Robert Hackett’s feature about the Google SWAT team of hackers that is trying to cover the frighteningly large number of gaps in security across the Internet. It’s an engrossing read that reveals much about how companies allow, detect, and respond to a kind of incident that gets no less frightening with familiarity. It’s the cover story for Fortune’s July edition and you can read it here.

Today, of course, is also Feedback Friday. Here are a couple of responses to yesterday’s note about CEO pay that add a degree of nuance that I couldn’t provide:

“I’d guess the divergence has not been nearly as pronounced at any level other than the CEO level—obviously the absolute ratio would be much lower, but, more specifically, I’m guessing you’d see a lower historical growth rate divergence between non-CEO c-suite and the average worker. And, so the CEO:worker ratio appropriately gets the headlines, but in that sense represents the problems of the 1% of the 1%. So, the question would be—is prosperity creation through corporate jobs more “equitable” if we change the data set by dropping out the winner-take-all CEO?”

“The problem is the methodology boards use to set pay. It is almost entirely based on “comparables.” What does the competition pay? We need to pay a bit more than that because we need to retain our CEO. Yet they all benchmark themselves off each other, resulting in a spiral of escalation, with no end in sight.”

(Thanks also to JUST Capital’s Robert Brown for pointing out that Ronald Reagan was borrowing from the Jewish religious scholar Hillel.)

On the subject of female representation on boards, which I talked about on Wednesday, Peter Gleason, CEO of the National Association of Corporate Directors, wrote to say that the issue is definitely not a shortage of qualified candidates. He pointed out that boards last year appeared to be putting more emphasis on prior board experience in candidates, “which leaves many qualified women out of the mix.” He also said there was no evidence to blame activist investors for what could still easily prove to be an outlying blip, but did agree that “the increase in other diversity categories for directors may have made up for the overall drop reflected in the number of women directors last year.”


Finally, this:

“This guy is terrible. Everything he writes is leftist and anti-business.”

The British orchestra conductor Thomas Beecham used to say that when you go on vacation, you should look for a deputy “good enough to keep them coming, but not so good that they don’t want you back.” At least I’m halfway there.

Enjoy the weekend. Alan will be back on Monday.

Geoffrey Smith


Top News

Senators Respond With Their Health Care Bill

Senate Republicans unveiled their draft health care reform bill. As with the House bill last month, it proposes to change and cut funding for Medicaid (albeit over a longer period) and remove the Affordable Care Act’s requirement for most Americans to sign up for health insurance. It also relieves businesses (and wealthier individuals) of a tax burden running to hundreds of billions of dollars. A poll by The Wall Street Journal and NBC suggests the public still supports the idea of fixing the ACA, but is unconvinced by the ‘repeal and replace’ measures announced to date. GOP Senators are pushing for a vote next week. Fortune

Banks Given Green Light in Stress Test

The Federal Reserve gave the country’s largest banks a clean bill of health after the first part of its annual stress tests, saying they could all survive and keep lending through a sharp recession. The report effectively removes a constraint from the administration, which is trying to roll back what it sees as excessive post-crisis regulation of the banking sector. It also removes a constraint on higher dividend payments from the sector. The Fed is due to complete the stress test process next week with a judgment on the quality of banks’ risk management. WSJ, subscription required

Qatar Seeks 10% of American Airlines

American Airlines CEO Doug Parker took umbrage at an informal approach from Qatar Airways, which has told him it wants to buy a stake of up to 10%. “We find it extremely puzzling given our extremely public stance on the illegal subsidies that Qatar, Emirates, and Etihad have all received over the years,” Parker said in a staff missive. The news came as Sunni Muslim states across the Middle East, led by Saudi Arabia and Egypt, presented Qatar with a list of 13 demands in return for ending their current diplomatic and trade embargo on the emirate. They include closing the Al Jazeera TV network, closing a Turkish military base on its territory and paying reparations for damages incurred because of Qatari policies. Quite a lot for a sovereign state to swallow, however small.

The ECB Trashes Brexit’s Birthday

Brexit is a year old today. The markets’ judgment remains overwhelmingly negative—sterling is down 11% against the dollar and 8% against the euro since the referendum, a big hit to local purchasing power and confidence. The European Central Bank this morning confirmed it would try to force the clearing of euro-denominated derivatives, to relocate to the Eurozone after Brexit, crystallizing one of the biggest risks to the City of London’s financial services sector. Similar shoes appear set to drop across the rest of the economy in the next few months, unless the U.K. and EU can miraculously dispel the fog over the outlook for life after Brexit. Bloomberg

Around the Water Cooler

Uber, Waymo Clash Over What Kalanick Knew 

Travis Kalanick knew that Anthony Levandowsky had Alphabet intellectual property in his possession but told him not to bring it to Uber, according to attorneys for the ride-hailing service. Uber is trying to refute claims by Waymo, Alphabet’s autonomous driving venture, that it conspired to steal trade secrets. It has already fired Levandowsky for not cooperating with the court hearing the case. Waymo interpreted the information as proof of its claims. Uber’s attorneys saw it as proving the opposite. The case is perhaps the most important issue facing the committee that now runs Uber in the wake of Kalanick’s ouster. WSJ, subscription required

July 4—Day of Destiny for the Oil Market

Crude oil prices fell to a 10-month low overnight on continued fears of chronic oversupply. Hedge funds, which had bought heavily into OPEC’s output restraint deal at the end of last year, are now more intent on testing the pain threshold of U.S. shale producers, with the credit markets also starting to act as a barometer of stress again. Markets have been transfixed by U.S. drilling, production, and consumption data in recent weeks, the best indicators of how quickly excess inventories will be whittled down. If the combination of low gas prices and the July 4 weekend (peak driving demand) don’t make a big dent in stockpiles, further volatility almost certainly awaits. Fortune

Tesla Makes Progress in China

Tesla is a step closer to building its cars in China, having started formal talks with the Shanghai municipal government. It will need a site and, under Chinese law, a local partner. That will allow it to avoid a 25% tariff on imported vehicles. Elon Musk had initially been leery of sharing his technology, but the profile of the Chinese market, which already has nearly half the world’s electric vehicles and is growing rapidly, appears to have changed his mind. The company said it expects to "more clearly define" its local production plans by the end of the year. Reuterssources indicate it will ultimately build the Model 3 sedan and the planned Model Y crossover in China. Fortune

Ireland Returns AIB to the Market

Ireland sold just under 29% of Allied Irish Banks for nearly $4 billion in an initial public offering. AIB is the largest remaining bank out of those that were bailed out in 2010 after the pricking of a real estate bubble, and the sale is a milestone in the country’s return to normality. The Irish economy has staged a robust recovery since the bailout, and S&P said earlier this year its banking sector is now almost fully recovered. The government, meanwhile, has now recouped half of the 20 billion euros it had to pump into the bank. The shares rose over 7% in initial trading. FT, metered access