Institutional Analysts are Almost Worthless

On December 18, 2008, I bought Maxim at 12.00/share and told my readers about my buy. Maxim is now selling for $13.70/share--a 14.1% increase in four months. The S&P 500 declined 3.1% during this same time period.

At the time I bought Maxim, JP Morgan disagreed with me. On December 16, 2008, JP Morgan's Christopher Danely downgraded Maxim stock to "underweight." In response, I wrote, "Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a 'sell' or 'underweight' rating, that's when contrarians and value investors should take a closer look at a stock."

My call was obviously correct, but what's really frustrating is that now, after the run-up in the stock price, several analysts are recommending Maxim.

On March 14, 2009, Canaccord Adams upgraded Maxim. Maxim's stock price was $14.05/share.

On March 15, 2009, Citigroup (C) upgraded Maxim. Maxim's stock price was $14.12/share.

If you had listened to these two analysts, you would be losing money right now. I don't disagree with the analysts' upgrades, assuming a long term horizon. I still think Maxim is somewhat undervalued, but I have considerably reduced my holdings and am waiting to re-enter at a lower price.

I continue to be skeptical of institutional analysts and their ratings. We need an independent website that ranks firms and their analysts based on their actual performance over three, twelve, and twenty four month horizons. The website should follow various analysts and rank them based on stock performance following an upgrade or downgrade. Hedge funds or well-off investors have access to such information, but the ordinary public is left in the dark when ascertaining analysts' credibility. That's a shame, because the public's relatively short term memory allows most analysts and their firms to avoid accountability. The Motley Fool has tried to create something along the lines of what I've suggested, but it doesn't track professional analysts.

I have been told that FusionIQ's proprietary software does rank analysts. I have been given complimentary access to the software, but have not had the time to actually sign on and evaluate it. I hope to provide a report on FusionIQ at some point in the future.

Disclosure: I own Maxim shares, and a family member works for Maxim.

Mexico Peso Devaluation

Holy cow, Mexico's currency declined 4.59% against the U.S. dollar in one day. That swine flu...

You can buy Mexico's peso through CurrencyShares Mexican Peso Trust (FXM).

Annual Reports: Part 2

I've been reading my annual reports and wanted to share the items I found interesting:

CME Group, Inc. (CME): this company generates revenues primarily from its clearing and transaction fees. (10K: page 31). In other words, it's a clearinghouse. [Update on 4/27/09: CME also "operates two self-regulatory futures exchanges" and offers information products--I did not mean to imply that CME is only a clearinghouse.] "Many clearing firms [CME's major customers] have expressed the view that...clearing houses should be operated as utilities rather than part of for-profit enterprises." (10K: page 41). Read that again--CME's customers are trying to lower their costs and will pressure CME on its margins.

Also, who's running this show? CME has 33 directors on its board. (10K: page 33) Of these 33 directors, 20--a majority--own trading rights on CME's exchange. CME is "dependent on the revenues from the trading and clearing activities of its members. This dependence may give them substantial influence over how we [CME] operate our business." (10K: page 33)

Duke Energy Corporation (DUK): Duke Energy's primary currency rate exposure is to the Brazilian real. A 10% devaluation in the currency exchange rate in all of Duke Energy's exposure currencies would result in a net after-tax loss on the translation of local currency earnings of approximately $10 million in 2009. (10K: page 31).

Interesting partnership with Walmart (WMT): "In a unique agreement with Wal-Mart, beginning in the second quarter of 2009 and for the next four years, our Texas facility will supply wind energy for a portion of the total energy used by more than 350 stores." (Shareholder Letter: page 7)

Goldman Sachs (GS): on the very last page of its 10K, Goldman Sachs lists its "Business Principles." Definitely worth a read, although I choked a little when I got to, "Integrity and honesty are the heart of our business." You can read the list of principles here.

Google Corporation, Inc. (GOOG):

International influence: "when Venezuelan broadcaster El Observador was shut down by the government, it started broadcasting on YouTube." (Shareholder letter)

Hear that, Microsoft?: More than one million organizations use Google Apps today. (Shareholder letter)

The future: "Computers will be 100 times faster still and storage will be 100 times cheaper." (Shareholder letter)

Holy cow, did Google just admit its P/E is too high?: "We believe our revenue growth rate will generally decline as a result of a number of factors including increasing competition, the inevitable decline in growth rates as our revenues increase to higher levels and the increasing maturity of the online advertising market. We believe our operating margin will experience downward pressure..." (10K, page 19).

Despite all its cool programs, Google is basically an advertising company: "Advertising revenues made up 99% of our revenues in 2006 and 2007 and 97% of our revenues in 2008." I wonder what caused that that 2% difference? DoubleClick?

Harvest Energy Trust (HTE): this stock is not a currency hedge. A lower Canadian dollar (relative to the U.S. dollar) actually helps the company's bottom line.

Jack in the Box, Inc. (JACK): first, kudos to JACK for maintaining its stock price. If you had bought and held JACK from January 2008 until now, you'd be about even. In a market where most stocks have dropped 30%-45% in that same time period, JACK and CEO Linda Lang deserve recognition. By the way, to those companies who claim they cannot find women to be on their Boards, how about Ms. Linda Lang? She's the closest thing to a miracle worker you can find right now.

Here's one reason JACK has done well: "Our focus continues to be on premium products versus deep value or discounting messages." (Shareholder letter)

Move towards franchising: "Jack in the Box transitions to a new business model comprised of predominantly franchised restaurant locations." "Our long-term goal is to increase the percentage of franchise ownership to the 70% to 80% range by the end of fiscal year 2013." (Shareholder letter) I hope this doesn't diminish JACK's brand. In my experience, franchisees tend to have worse customer service compared to company-owned locations.

Morton's Restaurant Group (MRT): Anyone with an extra invite to a Boardroom event, let me know: "Morton's continued to aggressively promote private dining for meetings and special occasion events in our private dining Boardrooms...Boardrooms generated approximately 19% of Morton's revenues in fiscal 2008." (Shareholder letter)

New York Times (NYT): "More than 40% of our full-time work force is unionized." (10K: page 11); "As of December 28, 2008, the underfunded pension obligation for our qualified pension plans was approximately $643 million." (10K: page 44).

Panera Bread Co. (PNRA): this one has nothing to do with PNRA's annual report. I just wanted to thank PNRA for its customer service. I recently lost a gift card at Panera Bread's Campbell, CA location. It had about 75 dollars left on it. I spoke to the local manager, who told me to call another PNRA representative. I got in touch with Robert J. and explained what happened. I faxed him my last two receipts (I keep my last two receipts to keep a record of transactions).

Robert told me PNRA couldn't track down the card without the full number on the back of the card, but he would see what he could do. He told me he'd get back to me within a few days. He actually did. Despite PNRA's and most companies' policies that the value of their gift cards will not be replaced if lost or stolen, he re-issued me the card. Now that's good customer service.

Word to the wise: whenever you get a gift card, write down and save the full number on the back, or register it online. Many companies allow an outside contractor to handle gift cards, so there's little communication in how to track the card. As a result, even with the most recent receipt, it's difficult to track down a lost gift card.

Customer service is important. In fact, it's the main way food retailers can differentiate their product. I used to go to McDonald's (MCD), because I really liked their coffee. Over time, some McDonald's locations got lazy. Some of its franchised locations would not offer half-and-half or sugar, or their half-and-half would be left on the counter, unchilled for hours. (This didn't seem to happen at non-franchised locations.) Anyway, when I wrote McDonald's customer service, they apologized and said they would fix it. After some follow-up communications, they contacted the supervisor at the location and copied my entire email to her. I was really upset--I had thought my complaint was anonymous--what customer in a food establishment wants the staff to know he's complained about them? Here is a snippet from my email to McDonald's, in case readers are interested:

The eggnog shake machine wasn't working, so I got a vanilla shake with gunks of yellow in it, rather than a smooth yellow shake. To the manager's credit, she allowed me to substitute another sundae for the eggnog shake, but she didn't seem to understand that my large shake was more expensive than a sundae. I know these are minor complaints, but McDonald's has more competition these days. You are competing against Starbucks and Panera, not just BK and Taco Bell. You are failing miserably in terms of service.

You need to analyze more why workers at Panera and Starbucks are more courteous than McDonald's and take action. Although your products and prices are competitive, you will lose market share if customers feel they can get better service elsewhere.

I've stopped going to McDonald's, even though I like their coffee. And I don't own McDonald's stock.

Pepsico, Inc. (PEP): Kudos to Pepsi for its colorful, descriptive 10K. After seeing page after page of different Pepsi products, I started wondering if Pepsi was the world's main supplier of food and drink.

Pepsi's motto: "joy, optimism and energy" (10K: page 6).

Walmart's influence: "In 2008, sales to Wal-Mart Stores, Inc. (Wal-Mart), including Sam's Club, represented approximately 12% of our total net revenue." (10K: page 45).

Playboy Enterprises (PLA): some interesting acronyms: PPM (per per month); VOD (video on demand); and SVOD (subscription package). Apparently, most companies are focusing on VOD. (10K: page 9).

Best summary of a company ever: "Playboy magazine is a general-interest magazine, targeted to men, with a reputation for excellence founded on its high-quality photography, entertainment, humor, cartoons, and articles on current issues, interests, and trends." (10K: page 9). Perhaps Playboy's corporate lawyers really do read Playboy for the articles.

Demographic of Playboy subscribers: median age is 35, with a median annual household income of approximately $59,000. (10K: page 9).

It's a small company: Playboy only has 626 full-time employees, at least as of February 27, 2009. (10K: page 12).

Also, in case you didn't already know, Hugh Hefner essentially owns the company. Mr. Hefner owns 69.53% of the Class A voting shares (10K: page 20). Class B shareholders--apparently, most of the shares owned by the average Joe--cannot vote, although they can come to the annual meeting in Illinois.

Wesco Financial Corporation (WSC): Charles Munger compares his company with Berkshire and basically tells the public to buy Berkshire instead of Wesco: "Business and human quality in place continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier." (10K: page 7)

Wynn Resorts (WYNN): some internal family drama: "Elaine P. Wynn is married to Stephen A. Wynn, but an action to dissolve their marriage has been filed."

At least the nephew's doing all right: "Andrew Pascal is the President of Wynn Las Vegas LLC...Mr. Pascal is the nephew of Mr. and Mrs. Wynn." (page 8, proxy statement)

Macau is where it's at: "Macau generated approximately $13.6 billion in gaming revenue in 2008...making Macau the largest gaming market in the world." (10K: page 6)

SJM in Macau: "SJM, which is controlled by Stanley Ho, operates 19 of the 31 existing casinos [in Macau]." (10K: page 6).

Sharing the wealth: Wynn is charged a special gaming tax of 35% of gross gaming revenue and "must also make an annual contribution of up to 4% of gross gaming revenue for the promotion of public interests, social security, infrastructure and tourism." (10K: page 13) Is it just me, or does that 4% look like a source of kickback money to government officials and their friends? I also like the language of "up to" 4%. Who determines the actual percentage? Seems like a material point.

Bring cash, please: for purposes of the gaming tax, Wynn cannot include deductions for gaming bad debt. (10K: page 22)

A pet peeve from a former English major: does anyone at Wynn own a Strunk and White style guide? In some places, the period or comma was placed outside the quotation marks, instead of inside. (10K: pages 4, 6) This ain't the U.K., buddy.

Note: Part 1 is here.

Torture Still up for Debate, and a Bill Maher Joke

From "The Issue of Torture is not about its Efficacy":

http://www.cogitamusblog.com/2009/04/the-issue-of-torture-is-not-about-its-efficacy.html

I never really imagined in all of my 49 years on the planet that there would seriously be a debate in the United States about whether it is alright to torture a prisoner. I don't think of myself as naive or unjaded, but it just always seemed pretty clear to me that American political culture would not sanction the overt use of torture as a legitimate means of intelligence gathering or war fighting.

The NYT's Frank Rich talks about torture here. And he makes so much sense, you will ask yourself, "Where was he six years ago?"

Ah, the days of innocence.

Here's something funny to balance out the bitter. Bill Maher mentioned California's beauty pageant contestant, who may have lost the crown because of her opposition to gay marriage. (She said she favored "opposite marriage.") Here's what Bill Maher had to say:

She's extremely Christian, kind of hot, and she's dumb...It looks like the Republicans have a new Vice Presidential candidate.

I think the GOP might be considering it. Sigh. Where's a Barry Goldwater when you need one?

O'Neill on Social Security/Medicare: Ponzi Scheme

Paul O'Neill on Social Security and Medicare:

We've been spending money all along. It's a giant fraud; it's a giant Ponzi scheme. Every year we took the money and we spent it on other things.

There's a so-called famous lockbox in West Virginia I went to look at when I was secretary of the Treasury. You know what's in the lockbox? Actually it's a filing cabinet, and there are some pieces of paper that say, "We owe you." There's no money there; there are no investments there. There's nothing there but a piece of paper. That's a fraud.

People think, "Hey, I put money all my life in Social Security and Medicare." You didn't really. The government just took it and spent it on something else. There's no money there.

More here.

Rafat's Law of Diversity

Here is what I call "Rafat's Law of Diversity": 

1. One constant variable in life is that change will occur.

Jim Rogers, Street Smarts (2013)

2. The ability to keep up with change and adapt to changing environments provides a competitive advantage.

3. Entities and people who adapt the quickest to change will have an advantage and will be ahead of their competition. In economic terms, this is called the ability to adapt to "creative destruction" (See Joseph Schumpeter).

4. As of 2009, the world population is becoming and has become more and more inter-linked. Globalization is occurring rapidly, causing persons who would have never interacted fifty years ago to now interact and to engage in numerous economic and social transactions.

5. In short, due to globalization, countries and entities are becoming more diverse.

6. Entities that have the ability to interact on a positive basis with numerous cultures will have an advantage over entities that either lack this ability or have less of it.

7. Entities that lack diversity appear to be slower to adapt to change.

8. Entities lacking diversity as their surrounding local or non-local environment becomes more diverse show their internal culture is more resistant to change or that they are unable to gain talent from a diverse range of sources.

9. Entities unable to draw talent from a diverse range of places or resistant to change will be disadvantaged against more fluid, diverse entities.

10. As globalization increases, entities that are more diverse will have both tangible and non-tangible advantages over non-diverse entities.

11. Therefore, more diverse entities will be more competitive than non-diverse entities.

12. As of 2009, Asians are approximately 60% of the world population. As of 2009, persons of African descent are approximately 20% of the world population. As of 2009, the United States has only 5% of the world population. Mandarin and Spanish are more commonly spoken worldwide than English.

13. The United States is a consumer-based economy that relies on domestic and international consumption of its products to increase growth, profits, and influence.

14. To fully maximize one's successful interactions with worldwide entities, one must be fluent in more than one language and well-versed in several cultures.

15. Multinational entities that fully maximize their ability to engage with several cultures will maximize their ability to gain new customers and allies.

16. Entities that fail to maximize their ability to engage with several cultures will be disadvantaged against multinational entities.

17. Familiarity with different cultures and languages will maximize a multinational entity's ability to compete globally, providing it an advantage over entities that fail to maximize their ability to compete globally.

18. "Familiarity with different cultures and languages" may be called "diversity."

19. Multinational entities that favor diversity will be more competitive than entities that do not favor diversity.

© Matthew Rafat

Update on May 14, 2012: according to an April 2012 McKinsey Quarterly report ("Is there a payoff from top-team diversity?" by Thomas Barta, Markus Kleiner, and Tilo Neumann), U.S. companies with the highest executive-board diversity had returns on equity 95% higher and earnings margins 58% higher, on average, than those with the least executive diversity.

Bonus: Individuals or groups speaking on issues is not a free speech problem. Problems arise when individuals use their free speech to gang up on private individuals or politically-disconnected minorities. Such a "minority classification" will vary based on geography. A transsexual in SF would present a different analysis than one in rural Wyoming and still another in the college town of Bloomington, IN, depending on the reach and power of the group. To smooth out such differences in power, the fed gov may and should intervene when speech presents the likelihood of physical harm to an individual targeted by "gang speech." If physical harm is not likely but access to equal protection and provision of gov services is affected, there is still a role, albeit a lesser one, for the fed gov, though in such cases, a "restitution fund" allowing the individual to move elsewhere may be the best solution. "Gang speech" may take many forms, and may include unions, corporations, or any group of powerful individuals targeting a private individual because of the private individual's speech or non-violent but non-conformist behavior. If America is to continue building on diversity as one of its strengths, it must allocate resources to maintaining this unique advantage. Just as freedom is not free, neither is diversity.

Update on January 15, 2017: "When disagreement comes from a socially different person, we are prompted to work harder. Diversity jolts us into cognitive action in ways that homogeneity simply does not." -- Katherine W. Phillips

Update on June 2017: I have created another "law" here: https://willworkforjustice.blogspot.com/2017/04/rafats-law-inflation-elasticity.html 

Brocade Communications Shareholder Meeting (2009)

Brocade Communications Systems, Inc. (BRCD) had its 2009 annual meeting on April 15, 2009. The day after the meeting, Brocade announced closer ties to IBM. There was no informal presentation. 

Although the meeting itself was bare bones, Brocade's Shareholder Relations team did a fantastic job. I don't think I've ever praised a company's investor relations team before, but Brocade's team deserves special recognition. 

First, they used a portable miniature microphone. A company representative went around the room offering the microphone to whomever had the floor. You would be surprised at the number of companies which use no microphones at all, forcing shareholders to speak very loudly or requiring executives to repeat questions. Most large shareholder meetings have one or two standing microphones where people can stand to ask questions. This works well for larger meetings. For smaller meetings held in a conference room, a portable microphone works best. 

Second, the food was fantastic without being ostentatious. In these hard times, companies need to balance saving shareholder money with projecting a strong, healthy image. No food or coffee at the annual meeting indicates a company that either doesn't care about its shareholders or is trying to cut costs to the bone. Brocade had coffee and mineral water--the basics--but it also had some of the best chocolate chip cookies I've ever had. These cookies were so thick, they looked like scones. If my mother hadn't taught me basic manners, I would have stuffed about 20 of them in my pockets. I asked someone who made the cookies. She told me it was Gunther's Catering. 

I called Gunther's and confirmed they made the cookies. He said it was his mother's recipe, and they baked them fresh every day. The company has been around for 39 years and specializes in wedding receptions. If you like chocolate chip cookies, get thee to Gunther's. 

Lest you think it was just the cookies that won my heart, I assure you that's not the case. Shareholder relations personnel handled themselves professionally. They did not treat me or other shareholders like unwanted guests crashing an internal company party. You'd be surprised at how poorly many shareholder relations treat ordinary shareholders--read my Visa post, for example, where a shareholder relations person tried to stop me from taking a picture with the CEO, who was actually happy to have his picture taken, and then demanded my contact information. 

Lacking a presentation, the meeting would have been over had shareholders not asked questions. CalSTRS and CalPERS representatives appeared at the meeting to check on their shareholder proposals. Prior to voting, the company did not allow any comments to be made on their proposals. A shareholder attempted to make some comments, but Brocade's executives refused to allow him a microphone. Their refusal seemed unprofessional, because disallowing comments on specific proposals stifles the flow of potentially unbiased information to shareholders. Although most companies will tell you to make your comments at the end of the formal meeting, polls are closed by that time. Strike one against Brocade's management team. 

After the formal portion of the meeting concluded, the California representatives asked for a preliminary tally of the votes. Brocade didn't have one. I've never seen this happen before at any major company. Strike two against Brocade's management team. 

I asked a few questions. I asked how the company was managing the integration of Foundry Networks (FDRY). CEO Michael Klayko said the acquisition was going well. I asked what specific gap in Brocade's (BRCD) products the acquisition fulfilled. Many times, companies will acquire another company to boost revenue but will lack a real need for an acquisition. CEO Klayko said that Brocade found it cheaper to buy the company than to create the technology in-house. Foundry, he said, had "more connectivity products." Also, Foundry had just released a new chipset/product the prior Tuesday, showing that the acquisition was going smoothly. 

I asked what problems, if any, Brocade had discovered in the course of integrating Foundry. CEO Klayko said that Foundry Networks' distribution channels needed work, and its "marketing was suspect." Brocade's marketing, however, was very good, and that's why the two companies would work well together. 

I asked how Brocade expected to compete with Cisco (CSCO) and Nortel (NT). Here's where CEO Klayko shined. He said that Nortel might not be the best example to raise, because of its bankruptcy. As far as Cisco--Brocade's main competition--was concerned, CEO Klayko said that Brocade offers "cost advantages." In other words, Brocade offered similar products but at a lower cost. CEO Klayko also said the marketplace wants an alternative. Only near-sighted customers want to encourage a monopoly, because maintaining the status quo would allow Cisco to keep its high margins and relatively higher prices. Another shareholder, who worked for an investment firm, asked about analyst reports relating to IBM. 

CEO Klayko said there were lots of rumors out there and deflected the question. (The very next day, IBM and Brocade announced they would be working together on various products.) 

Another shareholder asked about Brocade's real estate strategy (buying vs. leasing property) and received a vague answer. 

Another shareholder was unhappy about the lack of a presentation. He also criticized the in-person absence of 50% of the directors. In what was the most memorable line of the day, he told Brocade's management, "Make us feel like you give a damn about us [small shareholders]." 

CEO Klayko responded that all the directors were present, but some were present by teleconference. He told this shareholder that he'd seen him present at various meetings throughout the year, so the company did communicate with its shareholders. I may have misheard the next response, but the shareholder responded that the only reason he was able to get access to those meetings was as a client of a brokerage firm. In my mind, if any company is restricting or selectively disclosing material information only to analysts or major shareholders, it would be violating Regulation FD. Please note: I do not have any information about whether any violation of Regulation FD is occurring, and I am not making any allegation of securities law violations. I would be very upset, however, if any company communicated relevant information only to major shareholders post-Regulation FD. 

I asked the CEO about complacency. I asked what the CEO was afraid of or concerned about. The CEO gave me a five item list: 

1. Access to capital. 

2. New technology (which makes current technology obsolete). 

3. Acquisitions that change the competitive landscape. 

4. Innovative quality (how to maintain quality). 

5. Cost (keeping costs low to attract customers). 

CEO Klayko also talked about the "entitlement mentality." He seemed to be channeling one of my favorite CEOs, Cypress Semi's (CY) T.J. Rodgers. 

I asked about various memorabilia in the room, which included a jersey from The City that Shall Not be Named (at least according to ESPN's Bill Simmons) and a signed Hootie and the Blowfish guitar. The CEO didn't know about the stories behind any of the memorabilia. 

Here's where things got a little interesting. I pointed out that Brocade had presented itself as an all-white, all-male company. All four persons at the front of the room representing Brocade appeared to be older Caucasian men. There's nothing inherently wrong with that, and diversity does not guarantee success. At the same time, almost all successful global companies present themselves as non-monolithic. (Pepsi (PEP) and Coke (KO) are way ahead of the game in this aspect.) I also said the executive team's lack of diversity was strange because the company was based in Santa Clara County, where 40% of the population is born outside the U.S. 

One of America's greatest attributes is its ability to project an open, tolerant image, which has attracted many ambitious, diverse people. As a result, we have the Blackberry (Canadian); Yahoo (Taiwanese); Google (Russian); eBay (French Iranian); and so on. Companies and countries that fail to project an open, tolerant image will be disadvantaged as world economies become more globalized, allowing talent and money to move elsewhere. In a nutshell, Brocade appeared to be violating Rafat's Law of Diversity. 

When I mentioned Brocade's appearance of having a 100% native-born Caucasian male executive team, the one and only female on the Board of Directors, Judy Bruner, raised her hand with a smile. Ms. Bruner is probably a great person. She received her MBA from Santa Clara University, my alma mater, and Santa Clara University strives to produce ethical, well-rounded graduates. However, when the only female on a company's Board happily raises her hand to demonstrate diversity, it's hard not to think that the corporate culture is irretrievably monolithic. From my perspective, having only one female on an entire Board is not cause for happiness or active disclosure. Even North Dakota's MDU Resources, Inc. (MDU) has more females on its board (25% of its directors are female) than Brocade. Thus, to me, Ms. Bruner's reaction--immediately identifying herself as the one and only non-male Director, instead of letting the CEO acknowledge the company's lack of diversity--felt strange. By the way, with the exception of perhaps three or four people in the entire room, everyone else present appeared to be native-born Caucasian also, which isn't an inherent problem, but still unusual in a diverse city like San Jose, California. 

CEO Klayko did not acknowledge his management team's lack of diversity. Instead, he said that we needed to create better educational opportunities here in the United States, and we were falling behind in science and math. He said Brocade was participating in the Tech Challenge, which encouraged children to pursue careers in math and science. In other words, Brocade was actively working at the local level to attract diversity. CEO Klayko joked that he was recruiting [minorities] at the 5th grade level. In response to my comment that we lived in a county that where 40% of the residents were immigrants, he said Brocade was a global company, not a local one. 

Unfortunately, his response confirmed my belief that Brocade's management culture is monolithic. Most studies show that Caucasians are only 20% of the world population. Assuming a 50/50 split in females and males, only 10% of the world contains Caucasian men--which indicates the CEO's response wasn't statistically sound. Again, there's nothing wrong with having 90% or 100% of any race on a management team. In fact, after the meeting, Investor Relations pointed out that of the 8 directors, one was a female and one was Indian--not a bad percentage. It's culture I am concerned with, not race. From what I saw at the meeting, Brocade's management team seems to lack cultural diversity. Strike three against Brocade's management team. After the IBM news was released publicly, I sold all but one of my shares. If Brocade works well with IBM, its shares may go higher in value; however, Brocade's relatively high debt load may inhibit its shares' forward progression. 

I really enjoyed listening to the CEO. He appeared energetic, strong-willed, charismatic, opinionated without being crass, diligent, goal-oriented, and knowledgeable--in other words, someone born to be a leader. I could immediately see why he ascended the corporate ranks. At the same time, passionate CEOs generally need a Board and executive team willing to speak up and provide a voice of caution. I'm not sure that's going to happen. Strong-willed leaders tend to unintentionally crowd out dissent, especially when their companies lack a substantial number of women in the upper ranks. With only one female and one Indian-American on the Board, I don't see Brocade's current management team as being sufficiently diverse. Perhaps I am wrong. On my way out, I passed by a room with many busy workers. Everyone in that room appeared to be of Indian descent. 

Note: Brocade has a blog. CEO Klayko's most recent post is here. The first line of his post is this: 

We are a nation and an industry curled up in the fetal position. 

It's hard not to like someone so direct, passionate, and intelligent.