Some Snippets from Recent Reading

From Milton Friedman, on death by a thousand taxes:

We are not going to vote anyone out of office because he imposes a $3-a-year burden on us.

From Nicole Gelinas, City Journal Spring 2010, on municipal bankruptcies:

State governments can't legally declare bankruptcy to escape debt: the federal bankruptcy code doesn't cover them, and they can't write their own bankruptcy laws because the Constitution reserves that power for the federal government. Cities, towns, and counties, meanwhile, can file for bankruptcy only if their state governments allow it, and more than half of the states don't. Moreover, federal law requires eligible cities and towns to meet a strict standard for insolvency.

From James Madison, on power:

All men having power ought to be distrusted to a certain degree.

Google's Annual Shareholder Meeting (2010)

Google held its annual shareholder meeting on May 13, 2010. Google offers shareholders a free lunch every year. The picture above shows the kind of food available (in case you're wondering, yes, I did stuff my face). I really enjoyed the rice and chocolate eclairs.

Google typically posts a video of its annual meeting on YouTube as well as a transcript prepared by a certified court reporter, so there's plenty of information about the meeting available to the public. (See here for another review.)

CEO Eric Schmidt briefly mentioned Google's great results, saying "All is well after a year of great turmoil." During the meeting, Mr. Schmidt showed a fun commercial for Chrome called "Chrome Speed Tests," which highlighted the web browser's incredible speed.

I thanked Larry Page for showing up this year and asked him what he thought was the next "big thing." Mr. Page said that Google Translate is going to be a game-changer. The two-thirds of the world's population not yet online will greatly benefit from fluid translation services, which can be used in telephones and other mobile devices.

CEO Schmidt mentioned Google's plan to enable people to text-message in their native language and have it automatically translated into the receiver's native language. Although most of the world's populations do not have ready internet access or computers, many people have mobile phones, even in so-called "Third World" countries, so an effective translation service would connect almost the entire world together. Later, I thought about how an automatic translation service could preserve some little-used languages, which in turn could help preserve a small country's or people's cultural heritage. I also think it would be wonderful if a small business-owner who speaks only English could sell products directly to someone in China or other countries. Down the road, if Google creates a program that translates spoken languages, American business-owners could more easily hire and sell to immigrants who may have difficulty speaking perfect English. In addition, older immigrants--who may have difficulty learning and speaking English--would be able to communicate better with their grandchildren and the general public.

One side note: I thanked Mr. Page for attending this year and said I was feeling sentimental about previous meetings, where the atmosphere was more casual and he and Sergey would be dressed in jeans. Mr. Page immediately gave props to CEO Schmidt, touching him on the arm and reminding me that CEO Schmidt was also present at previous meetings. CEO Schmidt then joked that he also wore jeans at the previous meetings. I thought it was a great moment, because sometimes, founders and successors don't get along (e.g., Accuray, Inc.) and besides, who doesn't love a billionaire bromance?

Google had a product demo section, where I discovered sites.google.com. I coach youth basketball, and I've always wanted to create a website for my teams, but I've never had the time. Well, Google has already done it for me and other coaches. If you go to Google's "sites" page, you will find a template called "Soccer Team" that can be used to post game times, agendas, and pictures. It's a ready-made website that community centers, YMCAs, and private clubs can use to help streamline programs and help their players keep in touch.

There were some embarrassing moments for Google. Google received multiple complaints about the responsiveness of its Investor Relations department. One shareholder complained that Google took three weeks to return her phone call. Another shareholder said she was unaware of the annual meeting because she never received a proxy or an email notification and made it to the meeting only because a friend told her about it.

After the meeting, several shareholders went to the front to speak with CFO Patrick Pichette about their issues receiving proxy materials and notices. Mr. Pichette was very patient and explained that Google may be slower to respond to individual phone calls than other companies because of its engineering mindset. He said that Google was an engineering company, and engineers tend to think that if something is done properly, all the information is available online and there is no need to pick up the phone.

I don't understand why the company's CFO was handling these kinds of complaints. Typically, routine shareholder complaints would be handled by Investor Relations, not the CFO. At the same time, perhaps CEO Schmidt didn't feel comfortable referring shareholders to Investor Relations because shareholders were complaining about that particular department.

I've raised issues with the way Google's Investor Relations Department treats shareholders before. For one thing, Google doesn't permit any questions or comments during the shareholder proposal portion of the meeting. It allows a shareholder to set forth a proposal and then moves directly to a vote. If other shareholders have information or comments about a particular proposal, Google does not allow them to express themselves until after the proposal has been voted on, making comments a moot point. A more reasonable course of action would be to allow comments, but to limit the comments to one minute or less.

After the meeting, I spoke with someone in Google's Investor Relations, and she didn't seem entirely happy to talk to me. Not only that, but she didn't have any business cards on her. Google gets one day a year to interact with individual shareholders, and its Investor Relations employee doesn't have a business card to give shareholders? (At all the other shareholder meetings I've attended, Investor Relations has provided me with a business card if requested and actively encouraged me to follow up on any issues I had.) Outside, I ran into the same Investor Relations representative again, and when I asked her whether she had figured out the source of the problems mentioned by other shareholders, she curtly told me, "There was no problem." So let me get this straight: shareholders don't get notice of the meeting, and Investor Relations doesn't think there is a problem? Really? (By the way, I heard through the grapevine that even some Google employees/shareholders didn't know about the annual meeting until they received an email telling them the cafeteria would be closed due to the meeting.)

In most companies, Investor Relations is an overlooked and underutilized department, and I've never understood why. Investor Relations is the first place shareholders look when they have issues with a company, so if the department is stocked with unprofessional employees, the entire company's reputation suffers.

Some companies have wonderful Investor Relations people. Brocade Communications has a particularly excellent department. Tessera Technologies also has a great department. (Props to Sr. Director of Investor Relations Moriah Shilton, who seems like a consummate professional.)

On the other hand, an inexperienced or unprofessional Investor Relations employee can harm a company's reputation. After all, if a company can't manage to properly execute an annual meeting or treat individual shareholders with respect, you start to wonder what else the company can't handle. For example, at Visa's (V) first annual meeting, an Investor Relations representative demanded my name and personal contact information when I took a picture with the CEO. She then told me I couldn't publish the picture. Well, if a CEO is happy to pose for a picture with a shareholder, why bother the shareholder after the picture is taken? Here I was, at a company's first annual meeting as a publicly traded corporation, and I get accosted SS-style. (So far, no other company's Investor Relations department has demanded my papers.)

One year, at McAfee's (MFE) meeting, which was very short, I picked up some cookies and soda and began eating in the conference room where the annual meeting had been held. The Board of Directors also got some food and sat in the same room and started shooting the breeze. So far, so good, right? Well, McAfee's Investor Relations, apparently concerned about my presence, got up and shooed the entire Board into a different room. God forbid she actually introduce herself or the Board to the one shareholder who decided to show up to the meeting. I briefly attended a British elementary school, and yet, my only experience with a schoolmarm type has been at McAfee. (It's a shame, too, because McAfee's CEO is actually a nice guy.)

It's funny--I've attended McAfee's annual meetings twice, and each time, I think I was the only non-employee there. Yet, each time, the company had large tables of food and drink available. It appears that McAfee's Investor Relations department uses the annual meeting to fatten up the Board and treat non-employee shareholders like lepers. What's even worse is McAfee's competitor, Symantec, runs a great annual meeting and gives shareholders free software or other useful items. If you're a consumer company, why give people an excuse to favor your competition?

Anyway, back to Google. One Google employee seemed to think that shareholders could easily print out proof of ownership of shares and bring that to the meeting for admission. The problem is that you have to own shares as of the "record date" to attend the meeting, and the record date is typically several months prior to the annual meeting. So if shareholders come in with a current printout of their holdings, that wouldn't necessarily entitle them to admission, because they could have bought the shares after the record date. I'm not saying these issues are simple, but why have Investor Relations departments if they can't help ordinary shareholders navigate the increasingly complex world of shareholder proxies and regulations?

Shareholders who have issues with their proxies need to be more pro-active. Many Investor Relations employees don't seem to understand the machinations involved in individual shareholder notices because so much of the work is outsourced. Here's my advice to shareholders who stopped receiving annual meeting notices and proxies in the mail: contact your brokers and tell them you want to elect to receive copies of your proxy materials by mail. You have to actively opt back into the hard copy system if you want paper copies of shareholder materials. After July 1, 2007, companies no longer have to mail you hard copies of proxies and may email you a link to their materials on-line. Unfortunately, with all the online spam, some shareholders may not be getting notices because emails are being diverted into their spam folders.

I will close on a positive note. As most people know, Google offers its employees tons of perks, but I discovered two more of them: on-site washers and dryers and smoothies made-to-order, including a delicious banana/chocolate combination.

It's good to be King, and right now, Google is the King. Long live the King.

Tessera Technologies Annual Meeting (2010)

I attended Tessera Technologies' (TSRA) annual shareholder meeting today in San Jose, California. Tessera has acquired various companies and has about 470 employees, with many of them in Charlotte, North Carolina. About 25 people--but only two non-employees--attended the meeting. The company offered shareholders scones, coffee, juice, and various pastries.

CEO Henry R. Nothhaft handled most of the meeting with Bernard J. Cassidy. Mr. Nothhaft introduced the board members, handled the formal portion of the meeting, and then adjourned. Since there were only two non-employees present, the company chose not to present a video; instead, the CEO agreed to talk with me and the other shareholder and answer our questions.

CEO Nothhaft explained that his company's products go into most consumer electronics products, such as PCs, cell phones, and LCD televisions. Tessera has a semiconductor-related business and an Imaging and Optics business. On the semiconductor side, Tessera's technology connects the IC chip to the motherboard. It sounds simple, but consumer products are getting smaller every year, which means that motherboards and their components also have to become smaller.

Tessera's problem is protecting its IP. As more products are made in Asia, the legal framework and culture isn't necessarily conducive to an American company collecting royalties through patent litigation. CEO Nothhaft talked about Tessera's "carrot licensing program," where the company offers incentives to work with Tessera and to pay royalties. Overall, however, Tessera wants to become part of the supply chain in Asia so it can get paid at the time someone uses or buys its products. CEO Nothhaft described the IP issue "like solving a puzzle." He says he wants Tessera to "compete in the domestic Chinese market" for consumer electronics. To that end, Tessera has hired CTO Robert Yung. It has also signed up three new licensees in the China for its imaging/optics products. China currently represents about 20% of the consumer electronics market, and its share of the market continues to grow.

CEO Nothhaft also said that "incremental innovation occurs in the factory." He didn't expand on this concept, but I think he meant that outsourcing manufacturing and distribution may cut costs, but retaining domestic manufacturing allows a company greater protection over its IP and also allows it to work with employees to improve products.

CEO Nothhaft said that Tessera "firmly believes in the patent system" and called the patent one of the "greatest job creation tools." He said he hopes that other Asian nations will emulate Japan and its gradual respect for IP rights. CEO Nothhaft seemed excited about Tessera's optics/imaging business, saying he foresees "rapid growth" in products that use enhancing images, "smart camera modules," and facial detection. Such features could be used for surveillance, in automobiles, gaming (e.g., gesture control, Wii), and toys (e.g., a toy could detect a smile and respond).

If you read Tessera's s 10K, you will see numerous cases involving patent litigation. It seems as if a large chunk of Tessera's future revenue growth depends on its ability to navigate various Asian legal systems. Tessera's real value is in its 1900+ patents, but without a legal system in place to enforce those patents, one wonders how successful Tessera will be as more and more manufacturing is outsourced.

Disclosure: I own an insignificant number of Tessera (TSRA) shares and do not anticipate buying more shares. I am starting to fully understand why Warren Buffett avoids technology companies. Even if a tech company has great products, there are so many other factors involved in getting that technology to generate a consistent revenue stream.

Note: regarding Tessera's unique name: in 1992, Tessera was renamed from IST Associates--named for founders, Igor Khandros, Scott Ehrenberg and Tom DiStefano--to Tessera, the Latin word for "tile," for the closely stacked packaged chips that resemble a tile mosaic.

San Jose's Sam Liccardo: a Great Guy

I saw Sam Liccardo recently at an event in San Jose's Japantown. Sam is a Harvard Law graduate, former D.A., and current City Councilmember. San Jose is lucky to have him. When he is termed out of the City Council (in 2014?), many people expect he will run for San Jose's mayor position and win.

San Jose Water Company Annual Meeting (2010)

San Jose Water Company (SJW) had its 2010 annual meeting on April 28 in downtown San Jose. Pastries and coffee were offered to shareholders (see picture above). About 30 people attended, mostly company employees. Unfortunately, Norman Mineta, one of the Board members, did not attend because he was busy in China. Only one out of the eight directors attending the meeting was female.

Chairman Charles Toeniskoetter handled most of the meeting and congratulated an employee for 20 years of service. The CEO gave a brief presentation and said that the company was doing well but had "some political things to get through." (Last year, the company also complained about the political environment, but it hasn't been very specific about the political issues they are having.)

I skimmed the 10K and noticed that SJW owns a lot of land and real property. I also noticed that SJW has set up a subsidiary, SJW Land Company, "which has a 70% limited partnership interest in 444 West Santa Clara Street, L.P., a real estate limited partnership that owns and operates an office building." (page 15, 10K)

Guess who owns the other 30% of 444 West Santa Clara Street, L.P.? "A real estate development firm, which is partially owned by the Chairman of the Board of SJW Corp." (page 34, 10K) The tenants are "an international real estate firm under a 12-year lease." (Id.)

Visions of Enron-style subsidiaries flashed through my mind, so I had to ask about the limited partnership. I mentioned the Chairman's interest in the subsidiary and questioned why a water company was in the landlord/land business. The Chairman said that SJW Land Company took "land no longer needed for the utility and put it into the Land Company." He said that SJW has been in "the real estate business" for a long time, and it has been successful in that business.

The Chairman never mentioned any potential conflict of interest in owning property with SJW. It would have been nice if the Chairman told shareholders that he recuses himself from decisions involving SJW Land Company, but I didn't want to press the issue. I asked about the pension plan. The CFO said it was "90% funded" per IRS rules. The meeting concluded thereafter.

I hope to see Mr. Mineta at next year's meeting. I wanted to ask him about a story involving a baseball bat signed by Hank Aaron and Sadaharu Oh, the home-run king of Japan. See here ("The Camps at Home," 3/8/1999) for more on this story.

Disclosure: at this time, I own an insignificant number of shares of San Jose Water Company (SJW).

Anthony Bourdain's Favorite Food: Pho

Click HERE to read a review of a 2009 Bourdain speech.

Robert Half International Annual Meeting (2010)

Robert Half International (RHI) held its annual meeting in Millbrae, California at the Westin Hotel. Approximately 40 people attended the meeting. Unfortunately, I attended the meeting late and missed the video presentation and most of CEO Harold Messmer's short speech. However, a very perceptive and kind employee saw me come in late and allowed me to watch the video privately. The video, shown to shareholders and employees, discussed Robert Half's various businesses. RHI assists companies by providing flexible staffing. It is increasing its focus on small to mid-size businesses and believes the healthcare industry will represent increased flexible staffing demands. I was surprised by the diversity of RHI's businesses--RHI owns Accountemps, Finance and Accounting, Officeteam, Protiviti, and other staffing segments.

One segment of the video talked about "PEARL" (Pillsbury’s E-Discovery Alliance of Resource Leaders), an e-discovery service. For more information, click here. Law firms may be interested in such a program, assuming it is cheaper than hiring a temp legal agency (a service Robert Half Legal also offers).

The video also mentioned RHI's cash position of $349 million, with very little debt.

Everyone at the meeting was open and friendly. The hotel offered fruits, cereal, different juices, coffee, pastries, yogurt, and even a security guard outside the meeting hall. The CEO agreed to take a picture with me, and he didn't spend any time checking to see if it was a good picture (even after I told him it would be on my blog). Many executives are self-conscious, but CEO Messmer comes across as both suave and down-to-earth.

Now, I have to take time off work and sometimes drive moderate distances to come to annual meetings, so I get disappointed if there is no presentation or if the meeting is poorly run. When a company has a well-run meeting, like RHI, it makes me more confident as a shareholder and more likely to hold my shares.

Also, companies that offer shareholders goodies at the annual meeting get extra points in my book, because they are savvy enough to get free advertising. (It doesn't hurt to butter up shareholders, either.) The first picture above shows you all the different items I picked up at the meeting. RHI offered shareholders golf balls, different mugs, a stress ball, a hat, and a notebook. All of the items were branded, which gave the company a chance to show off its various businesses. Kudos to RHI for running a professional meeting and for treating shareholders to a fun morning.

Disclosure: I own an insignificant number of RHI shares.