Don’t Waste A Recession!, Top Silicon Valley CFO Speaks Out About the Economy, Madoff and Wall Street Executive Comp Limit

Ken Goldman is an accomplished executive with extensive financial, operational and business management experience and a solid track record of success. He served as senior vice president, finance and administration, and CFO of Siebel Systems from August 2000 until the close of Oracle Corporation’s acquisition in January 2006. Prior to that, he held CFO positions at Excite@Home, Sybase, Inc., Cypress Semiconductor and VLSI Technology. Ken’s experience additionally includes board director, audit committee chairman, and financial advisory roles at several leading public and private technology companies. Ken earned his bachelor’s degree in electrical engineering from Cornell University in 1971 and his master’s degree in business administration from Harvard Business School in 1974. He is a member and the former president of The Financial Executive Institute, Santa Clara chapter, and was formerly a member of the Financial Accounting Standards Board Advisory Council (FASAC) from 2000 to 2004.

 

Greg Selker: So first of all, Ken, thank you for taking the time to talk with me. I’ve come to know you off and on over the past few years, and so I’m just thrilled to have this opportunity to engage with you in this way.

Ken Goldman: Same here.

Greg Selker: I think the first area to talk about is the economy. Let me start out by saying that you’ve got a well deserved reputation for being one of the financial executives in the [Silicon]valley that runs the tightest ship. You’ve got great functional command over all of the areas of the financial organization – it’s your reputation and it’s well-deserved. So, from your perspective of someone who’s spent his lifetime building his career within financial organizations of large companies and for having a high degree of accountability, what’s your reaction in looking at some of the most aggrieves excesses that have occurred over the past six months in the collapse of the financial sector?

Ken Goldman:  Actually it’s very simple. There were two things that most amazed me. The first is the lack of really understanding and being concerned with the balance sheet. While I’m not an accountant, one of the things I was trained to do is to manage the balance sheet very well. So I’m amazed at how poorly these folks with a very sophisticated financial understanding did in terms of managing the balance sheet and balancing risk. The second thing is, if you look at some of these toxic assets held by many institutions, they never could and still can’t really measure their value and hence the impact on their balance sheets. The simple axiom is that if you can’t measure it – you can’t manage it. Since the value of these assets has turned out to be nebulous, they have not been able to manage the risk - and then take action accordingly.

As I watched this whole drama unfold it was clear that people played too aggressively toward the end. Clearly folks like Lehman Brothers and Bears Stearns had the opportunity to raise money. It’s like playing Russian roulette – you can hold out and hope to get a better deal, but at some point you have to know when to fold them up, take the money and live another day. It’s sort of amazing that the people who should have been very smart financiers – didn’t act like it. They didn’t add a little bit of conservatism to their plan and just take some money. Even if it would have been very “expensive money.” If they had done that, they would still be in business today.

Greg Selker: Right.

Ken Goldman: One of the things I’ve always told my staff is - focus on the balance sheet, and focus on cash. I remember at Siebel when we had $2B in cash on the balance sheet and we got all this flack about our lack of a stock buyback! More recently you’ve seen many other companies buyback their stock by going into debt, leaving them with no liquidity. And where are all the activist hedge funds that drove those companies to do that, and realized that was the wrong strategy? So, I think there was a lot of fast money – aggressive money, that played out as if the world only goes up and to the right. Well it’s good to plan that it could go the other way as well. This is fundamental training on what could go wrong, being prepared for that, and taking appropriate actions.

Greg Selker: Right.

Ken Goldman: You know, it’s no different than your personal balance sheet. I was just talking with some friends earlier today about the many folks that put all their money with Madoff. How can you put 100% of your assets with one guy!? The point is to diversify so if one investment goes south – it may make you very unhappy, but at least it’s only one of your assets – it’s not 100% or 90%. I’m amazed at how many folks basically put all their eggs in one basket. The last point I’ll make about this, which I’ve been saying and will continue to for years, is I really wish we would require good accounting financial literacy education – starting in high school and in college.

A friend of mine who used to be Juniper’s CFO, Marcel Gani, teaches an advanced accounting class at Santa Clara, after they have taken accounting 101. He’ll give a 10 question quiz, and these are simple questions, to the class ahead of time to gauge the level of their understanding of accounting, and they’ll consistently get seven or eight questions wrong.

Greg Selker: And this is an advanced accounting course?

Ken Goldman: Yes. It just validates that at basic educational levels we’re not spending enough time, and people are not taking seriously enough a goal to really understand accounting. I think that people need to take responsibility for their net worth. They need to understand how to manage their money. This all starts with having some rudimentary accounting and financial literacy skills.

Greg Selker: Certainly when you look at Wall Street and Madoff–and I think there’s a direct correlation between the inability to measure assets with the propagation of collateralized debt obligations, the lack of regulation surrounding them, and the irrefutable evidence that something was wrong with Madoff’s results. What’s in common with both is an acceptance of something that on the surface doesn’t jive with reality.

Ken Goldman: Definitely. In the instance with Madoff, here are people making money every month regardless of whether the market is down or up – they still make money. But at some point you have to think that this doesn’t make sense.

Particularly people who did any study at all of what he was doing. They would have known it was impossible to consistently get those results. Whoever was auditing his accounts was a one man game and somebody that no one had ever heard of. So where were the hedge funds and fund of funds that were investing folks’ money with Madoff? The most rudimentary due diligence would have led to ask the question, “who is auditing these accounts?” My own sense is that the general regulatory bodies in the US spend too much time worrying about “after the fact” enforcement - as opposed to “before the fact” anticipating the investigation to prevent it.

Greg Selker: Have you read some of the articles that Michael Lewis has written? An article in the New York Times in early January chronicled Harry Markopolis, an investment officer in a fund somewhat competitive to Madoff who tried for years to get the SEC to investigate what he surmised was outright fraud?

Ken Goldman: I’ve read a number of Michael Lewis articles but I didn’t see that one – if you want to send me that – that would be great, because he is extremely lucid

Greg Selker: I’d love to. One of the main points he made in the article “The End of the Financial World as We Know It” was that the revolving door needs to close between the SEC and Wall Street. There needs to be a greater time lag that occurs from individuals leaving firms and then joining the SEC.

Ken Goldman: That’s true, but I don’t know if that’s the core issue. I think the issue frankly, is on emphasis. I think the emphasis has to be on compliance – ferreting out issues ahead of time – doing more checks ahead of time – and stopping things early. In other words, where was the SEC in terms of reviewing the accounts of Wall Street – giving them actions to do and preventing what would occur – as opposed to after the fact fault finding and going after enforcement? You can now punish Madoff all you want– that doesn’t help anybody who lost their money in the $50B wipeout. They should have found him in the first place and stopped the fraud before it got going.

Greg Selker: Ken, it sounds like you’re in favor of more rigorous regulation?

Ken Goldman: I think regulation is good, if it’s done right. It doesn’t have to stifle creativity or the drive to make money. Good regulation just means that information is reviewed, and you make sure people are adhering to certain rules. I don’t think there’s anything wrong with that.

Greg Selker: I agree.

Ken Goldman: The other analogy that I used in a discussion the other day was about internal audit. Look, you can either beef up internal audit capabilities in a company, or you can spend more time on making certain you have the right controls in place and that these are being adhered to. I want to spend more of my time and my people’s time on controls. Making certain we have the people and the systems to get it done right first.

Frankly, I think we’re in a centralized world and need to centralize finance as opposed to de-centralizing it. I want to get it done right and not assume that internal audit will find something wrong after the fact. Because I think it’s always much harder to find what the source of the problem really is after the fact. If you find it after the fact – by definition it’s after the fact. The real question is would you rather have quality up front, or do you want to fix it after it’s broken? If you do it right the first time – then you don’t have to worry about all these specialists. The Japanese have done this well for many years – build quality up front. It isn’t any different in building financial controls. If you build the right controls up front, instead of going around after the fact and then checking it to see if it’s right, you have the controls in place to make sure you’re doing it right.

Greg Selker: Measure your choices.

Ken Goldman: Yes. I’d rather have 80% of the regulatory bodies worried about making sure companies are doing it right first, and maybe 20% enforcement. As opposed to 80% enforcement – and 20% making sure they’re doing it right. Again, I don’t know if those numbers are right – I’m just giving you directionally where I’d like to see the emphasis.

Greg Selker:  What are your initial thoughts on the proposed salary cap on executive compensation in the financial sector, and what do you think Silicon Valley could teach Wall Street about executive compensation?

Ken Goldman: Well first of all let me say that the proposed compensation caps strike me as a little vindictive, but I can understand the feeling that something has to change. Wall Street has brought this upon themselves. They’ve acted short sighted and short-term oriented in their thinking, and even worse, they’ve been driven by an entitlement mentality as opposed to a performance driven mentality. I mean, how many businesses could survive if the rules of compensation were no matter how we perform as a company, we’re going to be paid our bonus regardless. This is not how we’ve paid our executives at companies I’ve been involved with.

Typically around technology companies, there’s a bonus pool that’s created that is dependent upon corporate performance. Once the pool’s created, participation is determined by individual achievement of personal goals along with other criteria. If the corporate performance isn’t there, then there’s no money to fund the pool, and there’s no cash bonus payouts. This has worked pretty well for us over the years. On Wall Street, for some of the firms, particularly for some of the largest ones, this has not been the case. It’s been a situation where people were paid bonuses regardless of corporate results. It’s the epitome of a culture of entitlement. Now I know that these practices have not necessarily existed at all firms, or that they have existed at all times over the years, but they seem to be more prevalent recently.

Maybe the answer is to move bonus payments more towards stock payments as opposed to cash, stock payments occurring in both options and restricted shares. In some firms, I know that the granting of stock has been an important component of their bonus structure. But even with these firms, given the horrific results reported, maybe the right thing to do would be to pay bonus awards in their entirety with stock. This also would have the effect of pushing long-term thinking and investment in the company as opposed to short-term thinking, short-term payout, and entitlement. I won’t pretend to have all the answers here, but I know that this entitlement mentality and culture with its focus on short-term rewards has to be replaced by a performance mentality and culture, and a reward system that incentivizes employees for longer-term results.

Greg Selker: I know we’ve talked in the past about the overall IPO market and how that affects your plans as a company in terms of your growth and expansion. With the current climate and the return of the IPO market being volatile, and most likely pushed out even further, how does this effect how you look at growing and developing your own employee base?

Ken Goldman: Well I think the good news is we are private. The expectations with Fortinet before I got here were to go public in ’06 – ’07; but we weren’t ready as a company to do that. In ’08 we probably were close to being ready. I honestly never felt the market in 2005 was conducive to taking a company public. Last year was a year in which we had more companies withdraw their filings than file to go public. My perspective is you that you only file for an IPO when you’re absolutely prepared to go out – come hell or high water. I never felt there was a time in ’08 where it looked like a good market for a public offering. 2008 was just way too volatile.

In terms of ’09, the conventional wisdom says it’s going to be a horrible year – but I never believe conventional wisdom. I think Q1 will be a horrible quarter – a really horrible quarter actually. But that could become a low point and therefore, from a very low base, things hopefully have got to improve. So I think there’s a chance the market could improve later this year as opposed to everybody’s perspective that it’s going to be horrible. The thing that I worry about is when things do start to improve, with all the money being put into the system inflation could come back. With inflation, interest rates would likely go up, and now you have the seeds of another downturn.

All of this has to be managed. But my own sense is that even though conventional wisdom says everybody has basically written off ’09 and maybe even ’10 – I mean everybody – it’s like when you watch sports, everyone says, “Team X is going to win.” Well maybe team X ends up winning, but maybe they lose. We’re in the space where I don’t think any of us know. But the point is, I’m not willing to give up on the year like a lot of other people have just because it’s obviously started off pretty ugly.

Greg Selker: Well I’m glad to hear that.

Ken Goldman: So there’s a little ray of hope. So maybe you’ll come back and quote me at the end of the year and find out I was wrong - and so be it.

Greg Selker: We feel the same way actually. From our perspective, even though there’s a lot of conflict going on, I think there are pockets of growth. Even in retrenchment people are looking more carefully at who they have on board, what they need to do to get the most out of their people, and what they need to do to bring people into their company who deliver even greater expectations.

Ken Goldman: Somebody had a good comment at a meeting I was at this morning. They said, “the worst thing you can do is waste a recession.” I think this is a very good way of saying it.

Greg Selker: Absolutely.

Ken Goldman: Don’t waste a recession. Use the time well to do things that need to be done, and force yourself to do things you might not have done otherwise.

Greg Selker: Exactly.

Ken Goldman: So if it’s upgrading your people – hiring in some very good people that are now available – rolling out some new products – and just doing certain things. Don’t just “give up.” Use the recession wisely, knowing that at some point things will come back and you’ll be more prepared for it. Don’t just hunker down and do nothing. “Don’t waste the recession.”

Greg Selker: So with that in mind what are the ways in which you see your company not wasting the recession?

Ken Goldman: Well in our case, in technology, I’ve always learned that it’s all about the products. Always remember that – technology is all about the products. So we’re going to continue to invest heavily in R&D. We’re going to continue to focus on bringing out our new products on a timely basis. Then we’re going to look at how we can price attractively, and how we can aggressively hire good sales people from other companies. I think it is a great time to hire sales people. So we’ll continue to do what we have been doing, which is to invest in people.

We will also set some high standards in terms of our quotas for this coming year. We’re setting a high bar for achievement and we’re aggressive. On the conservative side, we’re budgeting to keep our expenses under control. We’re going to make sure we’re running an efficient shop and not spending money in a nonsensical way. On the other hand, we intend to invest in areas that we think will pay dividends when we do have an upturn. We think we can grow through the tough times and gain market share.

Greg Selker: Right, beautiful.

Ken Goldman: So that’s what we are doing. Based on my prior experiences in the semiconductor industry, there will be an upturn, you just don’t know when. But you do know that it’s easier to gain market share in a downturn than in an upturn. Because in an upturn, the rising ocean lifts all ships. In a downturn, there’s always some that don’t have the cash resources, or the wherewithal to make significant gains. And our goal is to gain market share. So we’re going to drive what is necessary to produce that result. We have a strong balance sheet with a strong cash flow. We have a clean balance sheet. We’re well poised. It’s all about the “core” details of the balance sheet, when you come back to it. People get hung up on the P&L – and they forget about the balance sheet. The balance sheet is really very important. I can tell you that I know every account on our balance sheet. I review this in detail at least quarterly. I review all of our assets, prepaids, other assets and all the little stuff.

I love Finance. I love planning. But the accounting and your cash position are very important. This is where it all starts. And some things haven’t changed. I’m still a big fan of really getting into the details. If I get into the details and my people get into the details, that means we’re watching what’s important. To me, cash flow is very simple. How much did my cash go up? I don’t need a big cash flow statement. I do look at it, but the cash flow statements you see in these financial statements don’t often help you. The key is: what’s my actual balance sheet cash? How much did it increase? Then look at the key drivers of that. That is what I do.

Greg Selker: Ken, how many boards are you on now?

Ken Goldman: I’m on six boards now. Three public and three private.

Greg Selker: And of the public companies – are you on the audit committee for all three?

Ken Goldman: Yes. All the private ones too.

Greg Selker: Well that’s a significant time commitment.

Ken Goldman: Yes it is. It’s the reason why I get so many calls to join boards. You think they want me for my looks? The good news is I’m able to do some of the meetings from my office– so I’ll call in for the private companies. You know, I was reading something about Warren Buffet where he said that being an operating guy helps him invest, and being an investor helps him run an operating company. My involvement with boards follows the same principle. Being CFO with Fortinet helps my work on boards – and being on boards helps my CFO role. There was a period of time when for a few months after I left Seibel as their CFO I was just on boards, and frankly you start losing your edge.

Greg Selker: I see what you’re saying.

Ken Goldman: I think a company can have one or two professional board members, but I think a well balanced board needs to be composed of people that are still in the game and still actively working. Because, you’re just a lot sharper when you still have to make decisions and kick some butt yourself. So I think I’m actually a better board director, and a better financial executive for doing both than just one or the other. When I was only sitting on boards, I didn’t think I was accomplishing as much. Too many meetings. But now as the CFO of Fortinet, and sitting on several boards – I actually have been accomplishing more as a board director and as an operating executive.

Greg Selker: Very good. Well Ken, this has been great – so thank you for your time and insights.

Ken Goldman: You are welcome. Thank you as well.

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