Recent events at NetJets, Part 2: The Public Relations Crisis
Mon, 12/21/2009 - 20:28
(See Part One here.) The New York Times story of December 3, 2009, “Potential Successor to Buffett Has Tough Task” is noteworthy, and not just because of its contents. In an unusual move, NetJets hired a crisis communications public relations firm to help it respond once the Times began reporting.
Even in a crisis, Warren Buffett has avoided crisis communications PR: for example, at Salomon, and during General Re. His approach is: pick up the phone and talk. Berkshire does not have an internal PR person; Buffett is Berkshire’s PR person. He has exceptional media skills, rarely makes mistakes, and is skillful at negotiating when to speak on background, off the record, or with quote approval.
In pointing out this contrast I am not criticizing NetJets or Sokol for hiring a PR firm. Nor am I endorsing the “pick up the phone” method. Buffett’s PR approach is a personal style and I believe it shouldn’t become a litmus test for anyone else. Rather, what this episode signifies is the beginning of the “corporatization” of Berkshire that would take place if Sokol is put in charge. Again, I want to stress, at the risk of repeating myself, that this is not necessarily a bad thing as long as it is kept in reasonable bounds.
You may be asking yourself, why is the management change at NetJets a crisis? Berkshire has had money-losing businesses before. At NetJets, Sokol has got an enormous challenge on his hands. The changes he’s making at NetJets are so significant that Sokol’s angry employees apparently took their complaints about him to the press.
Try to imagine Berkshire employees doing that to Buffett. It’s unthinkable, right? Buffett could order animal sacrifices on his birthday and his employees probably wouldn’t complain to the New York Times.
One reason for that is that Buffett almost never criticizes anyone by name. In keeping with that practice, he is not quoted anywhere in this article. Although the harsh changes have been ordered by him and are being made with his approval, he is staying well out of the way. Sokol has signed up to be the bad cop.
This suits Buffett's personality. But .... there is also a business synergy in this arrangement (which echoes the Warren/Charlie dichotomy); shareholders are best served if Buffett keeps his image simple and clear. Berkshire is in the business of making acquisitions, and Buffett's endearing image is part of what is so appealing to potential sellers.
That raises the obvious question …. What is his successor to do? No matter who succeeds Buffett (Sokol, if he pulls off the turnaround) this part of the franchise will be “lost” after Buffett is gone, because it is unique to the way Buffett has arranged his image over the years. Buffett has gone to a lot of trouble to be universally liked. I can't think of anybody else qualified who can replicate that. (Nominations, anyone?) Plus, in a transparent Internet era, it's unlikely that anyone else could pull it off even if they wanted to do so. We already know this, on some level, yet the situation at NetJets is a vivid illustration of the conundrum. Picture a CEO thinking to himself, hmmmm, do I want to sell my company to David Sokol? (or whoever) and you get a completely different set of thoughts going through that person's head than if the buyer is Buffett and the thoughts are simply a) he'll leave me alone b) I won't have to retire c) he'll praise me in the shareholder letter.
As an illustration of the perception issue, the article contained some pretty harsh criticisms of Sokol by NetJets employees. He may indeed be a tough guy and perhaps he’s a jerk. I don’t know. But do consider:
- Turnaround CEOs are nearly always perceived as cruel, heartless grinches because their job is to take away the toy chest and make everybody work harder. Complaints about the people who perform this thankless task are ubiquitious and don't mean much when it comes to what lies ahead;
- Employee sources complained that Sokol demanded more than once that they be truthful with him and expressed this in a brutal manner. If so, it’s hard to blame Sokol for that. He obviously realizes that the biggest risk he faces is that Santulli loyalists will sabotage and undermine him. They have every incentive to do so – not least because if Sokol turns around the losses at NetJets, he has the CEO job at Berkshire locked.
Next post: What happens at NetJets, stays at NetJets. Or does it?
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Well done
Great blog. You are both knowledgeable about your subject and not a hero worshiper. Very valuable resource you are. Nice niche you've carved out for yourself. Keep up the good work.
As The Turbine Whines
Hi Alice,
I think this series will be an excellent basis for the sequel to snowball. Employee anger at NetJets seems to be misconstrued. The hubris in the press is from the former employees and deposed "executives". The wool has been pulled from our eyes and we now know that our former “father figure” had been promising salvation all while essentially stealing from Omaha to give to Columbus. The former CEO has even reneged on a pledge to the “NetJets Family Foundation.” The anger from the current employees is at the same deposed executives for creating this situation:
LOSSES
- Losses of $1.3 million per day
- Passionate pleas for employees to take voluntary pay cuts to "save" the company (many of whom took cuts upwards of 40%)
MEANWHILE
- CEO earnings of >$8 million, YTD on the day of his "retirement" and
- A gleaming Camelot Campus project that enriched the personal lives and political agendas of local cronies and affinity groups
The irony is that Sokol will be viewed as the turnaround king simply by allowing the professionals to do what NetJets has always done before the carpetbaggers robbed Warren blind - utilizing private aviation to increase business productivity at a fraction of the cost of a whole corporate flight department. It’s a solid value proposition and not a luxury business. We’ve always needed simple managerial discipline and less “keeping up with the Joneses.”
It's not rocket science, but it's much like "Days of Our Lives." The employees call it: "As the turbine whines." Seriously. We'd like to simply get back to aviating. Check our financial performance at the end of the first quarter of 2010 to see the results of fractional aviation operated with more business acumen and less simple elegance and cow towing to the uber-rich.
Keep digging for the truth. It will make a great book that the operational employees wil really enjoy! With respect to the truth, NetJets has continuously maintained a relationship with the PR firm you mention and the Times article in no way prompted the allocation of new resources. In fact, Sokol himself was the primary point of contact for the NYT reporter - but never mind that - that would be quite disinteresting, wouldn't it?
Happy New Year!
response
Happy New Year to you.
To begin with your final point, the crisis communications PR team was called in to handle the recent situation. Crisis communications is a remote and specialized outpost within a public relations firm which is engaged only when a serious crisis occurs. Think of them as the Men in Black. Most companies never have cause to call in the Men in Black. The point here was the contrast with Berkshire.
Second, I suspect some of the readers of this board will debate your statement that NetJets is "a solid value proposition and not a luxury business." Fractional jet ownership has been described by Warren Buffett as economically not justifiable; it is bought purely for convenience and personal preference. This is the very definition of a luxury.
"Check our financial performance at the end of the first quarter of 2010 to see the results of fractional aviation operated with more business acumen and less simple elegance and cow towing to the uber-rich." With all due respect, please remember that you are writing this on the blog of a financial analyst. Any company that installs a "turnaround" team and takes a big bath write-off as NetJets did can report whatever it wants the next quarter. It's not only easy to engineer good numbers, but perhaps some might view it as imperative to make the new team look good. As Warren Buffett often says, any one quarter's results are meaningless. I hope this does not mean that NetJets is getting into a quarterly earnings management frame of mind. (Am dead serious about this. It is one of the risks of any post-Buffett regime at Berkshire.)
Writing down assets may be necessary, but I'm a hardened cynic about the numbers reported after a big bath charge. If NetJets reported losses for at least a few quarters it would feel more reasonable. Turnarounds do not happen in three months. (p.s. it's kowtowing. If NetJets is now in the cow-towing business, God help us.)
Lastly, I don't know whether you are right about what Santulli earned, but let's have a little perspective here just using that number. Santulli gave away his upside from NetJets equity to Warren Buffett when he sold the company for $725M. Based on NetJets' growth, I would estimate its value today in the public market would produce a five-bagger return on that number over the 11-year period. The performance of Berkshire or any other asset class that Santulli would have substituted obviously cannot compare to this. So for crying out loud. Let the man whom Warren Buffett used to refer to as one of most talented managers and best friends have his measly $8 million. Besides, if NetJets were public today, Santulli would probably be collecting dividends of more than $8 million.
NetJets saga
Hi Alice,
It is always so facinating to keep digging for the truth regarding this ongoing saga. Clearly each faction has their own ax to grind and spinners do so enjoy spinning when the opportunity presents itself.
I am curious about bonus season at NetJets for the newly minted leadership team (which by the way, other than the CEO, is comprised of individuals that were in senior leadership positions during all of 2009 - when the company generated the worst operating results in its history). Rumor has it that the EMT (Executive Management Team for those of you not familar with the fancy acronyms that accompany turnarounds), received hefty bonuses, similar to prior year levels (when the company was profitable).
Given the round of layoffs of both crew and non-crew personnel and the level of losses generated by NetJets in 2009, it would seem to make sense that executive bonuses were eliminated or at least minimized. Hard to believe that a successfull leadership team would fire people somewhat heartlessly and then gorge themselves at the bonus trough months later. Ah, perhaps these bonuses were positioned as "retention bonuses", another favorite term in a turnaround situation.
I just wonder if all remaining employees at NetJets we given these generous retention bonuses?
I am sure there is more to come, especially given the rumors swirling about regarding service related issues so documented in a letter sent to owners recently.
NetJets saga
Hi Alice,
It is always so facinating to keep digging for the truth regarding this ongoing saga. Clearly each faction has their own ax to grind and spinners do so enjoy spinning when the opportunity presents itself.
I am curious about bonus season at NetJets for the newly minted leadership team (which by the way, other than the CEO, is comprised of individuals that were in senior leadership positions during all of 2009 - when the company generated the worst operating results in its history). Rumor has it that the EMT (Executive Management Team for those of you not familar with the fancy acronyms that accompany turnarounds), received hefty bonuses, similar to prior year levels (when the company was profitable).
Given the round of layoffs of both crew and non-crew personnel and the level of losses generated by NetJets in 2009, it would seem to make sense that executive bonuses were eliminated or at least minimized. Hard to believe that a successfull leadership team would fire people somewhat heartlessly and then gorge themselves at the bonus trough months later. Ah, perhaps these bonuses were positioned as "retention bonuses", another favorite term in a turnaround situation.
I just wonder if all remaining employees at NetJets we given these generous retention bonuses?
I am sure there is more to come, especially given the rumors swirling about regarding service related issues so documented in a letter sent to owners recently.
Business improprieties
Alice, thanks for continuing this article. Do you have any idea what the "business improprieties" and "improper workplace behavior" are at NetJets? If it turns out this is just a commodity airline business (as I suspect it is), how does one become a "luxury" provider in a commodity business, if a commodity business requires one to be the lowest cost operator for financial success?
business improprieties
yes, I will comment in part 3. These are great questions and #2 especially was implied by the NYT article and never answered. My short answer is that you can't. To put it yet another way, I don't see how you can succeed by trying to become a low-cost operator in a luxury business. You end up commoditizing the business. Will have some more thoughts very shortly on this.
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