The Kraft acquisition of Cadbury provides a vivid illustration of why the US model of screwing workers to preserve executive bonuses does not go over well abroad.
Brief synopsis: Kraft acquires the 200 year old British confection-maker Cadbury after a heated battle. The chairwoman and CEO Irene Rosenfeld (already not a good sign, best practice is to separate the two roles) was awarded a 41% pay increase, bringing the total to $26 million for 2009 for her “exceptional role” in the Cadbury transaction, as well as her “commitment to fiscal discipline.
Huh? Doing deals is part of a modern CEO’s job. Unless her role was SO exceptional that it saved Kraft several million in deal fees, this just looks like a trumped up excuse. It is far too early to tell if the Cadbury acquistion was a good deal or not, thus special bennies look mighty unwaranted.
Indeed, the board looks like is was snookered (as in how would they know how “exceptional” her role was? Those reports would only come from her or staff and advisors loyal to her; teh board most certainly not involved enough in transaction details to have an informed view.
The press is blandly reporting Kraft party line on a monumental stuff up. From the Financial Times:
More than 3,000 Cadbury employees face a three-year pay freeze unless they opt out of the confectioner’s final salary pension scheme.
New owners Kraft Foods, the US food group, has told 3,600 staff that they must accept a pay cap after it discovered an obscure clause in Cadbury’s pension trust deed that makes it almost impossible to close the scheme.
Kraft did not know about the clause, which is at least 30 years old, until after it acquired Cadbury for £11.6bn ($17.6bn).
A person with knowledge of the Cadbury pension fund said he did not know why such an unusual clause existed, but it could be linked to Cadbury’s Quaker heritage and its doctrine of giving a fair deal to staff and suppliers. Kraft is forcing employees to accept a pay freeze because it believes this is the only way it can get its future retirement costs under control. “The scheme is unaffordable going forward,” said one person involved.
Yves here. Can you parse the bullshit? That “obscure clause” nonsense is a “the dog ate my homework” level excuse. Due diligence includes a review of material contracts. A pension is a major contract and would get a lot of attention. Someone on the Kraft team made a colossal error, and is trying to shift blame in a ham-handed fashion.
And “the scheme is unaffordable” is a plain lie. Kraft can afford it, it simply does not want to pay it. But Kraft is quite comfortable with lying, unethical behavior is clearly how they do business:
Kraft came under fire from British workers over its broken promise to save from closure the Somerdale factory in Keynsham, Bristol, thereby safeguarding 400 jobs
Reader M.P., a retired money manger who ran a top-rated fund noted:
So Kraft did not do due diligence and now it wants to play dirty. Is it any wonder that American finance is now despised everywhere, even in the U.K!
Yves here. So welcome to 21st century capitalism, where management never has to admit, much the less bear the consequences of its errors. Just take it out of the hide of the little guy.
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Kraft has had some excellent free tuition from the actions of ‘to big to fails’ in how to dodge any form of responsibility, guilt or consequence.
How ironic! One of the key initiatives in UK and European corporate governance was the Cadbury Report (1992), which was in part a response to Robert Maxwell’s abuse of the Mirror Group pension fund, and which expressed a preference (paragraph 4.9) for a separation of the roles of Chairman and Chief Executive: http://www.ecgi.org/codes/documents/cadbury.pdf
Dear Vinny, youre beeing very clever.
“This îs so typical of how American businesses operate. They lie, cheat, and steal with impunity.”
Hear! hear!
Thatis the true. Anglosaxon world management is almost completely looting way of foing money.
Of course Yves says:
“Yves here. So welcome to 21st century capitalism, where management never has to admit, much the less bear the consequences of its errors. Just take it out of the hide of the little guy.”
But this isnt capitalism. This is looting. This is the management who dominates the corporation and loots his stakeholders. This isnt capitalism. You cam blame capitalism but it isnt.
This is a political and economic system who isnt based in capitalism but lack of The Rule of Law, lack of anti-trust agencies, lack of criminal law and so on.
This is the result of the origin here:
http://homepage.newschool.edu/het//essays/paretian/paretosocial.htm
When the government is captured by rent seeking oligarchs and the judicial system lacks of authority or power to fight the looters, we can see how is easy to loot others withut any sanction.
How many lobbists live in Washington? Isnt lobbying the legalalized corruption in the system? Isnt lobbying the modern way to implement the fascism, borned in Italy, some years ago? Who rules the political system in USA? The people? Or the power of money, through lobbying, by who dont want free markets but cheating the people?
Of course you can blame the capitalism. But this isnt capitalism. This is economic fascism. This is the power of some oligarchs on political leaders. This is the evolution of economic thought in Italy (and others europeans places) that gave Delano Roosevelt and Hitler their ideology. Roosevelt was more clever because he didnt believed in authoritarian political systems.
Some can argue that Roosevelt was inspired in Keynes, but isnt true. Keynes publicized his theories after Roosevelt changed the aproache to repair market failures. Roosevelt was clever enouph to understand the excessive power of some economic agents. Insprired in the economic thought in the otherside of the world.
Today there myths. Keynes is a myth as that USA live in a economic free capitalism. No, USA lives in one new type of economic fascism.
This is the plain truth. Deny it or embrace it. Its up to everyone. But we cant deny that USA hasnt a free capitalism system. No. No way, José. That inst truth. Inst the market forces who choose the winners, is the best and more clever that can change laws in Washginton. To win in the economic system in USA, you must buy politicians through the legalized corruption: lobbying.
Is this capitalism? No. No. This is economic fascism.
By the way, and is of the topic. Have you all noticed the inflation leading indicators scream?
Gold, interests rates, oil, copper and so on are in fire.
And, for surprise for some, even the real estate is taking off:
“Home sales contracts leap higher
NEW YORK (CNNMoney.com) — Contracts for the sale of existing homes rose sharply in February, according to a widely watched industry report released Monday.
The National Association of Realtors’ Pending Home Sales Index rose 8.2% in February to 97.6 from a downwardly revised 90.2 in January. The increased surprised economists surveyed by Briefing.com, who were expecting a 1% decrease. ”
In http://money.cnn.com/2010/04/05/news/economy/pending_home_sales/index.htm
Welcome to the consequences of action from students of Zimbabwe School of Economics.
This îs so typical of how American businesses operate. They lie, cheat, and steal with impunity. The only thing they understand îs to be hit with massive lawsuits demanding they pay reparations. At least that îs what they understand now. But I am sure in their inability to see the writing on the wall, they will push the people to the point where the only message they will then receive from people is to hunt these criminal CEOs like the subhumans dogs that they are, and offer them the justice of piblic lynching that they deserve. It is coming… to an American corporation near you.
Vinny
Ahem…pubic or public old boy, tis a Freudian thing [?] or one to many frappes.
Skippy…play time for adults.
I think we can accomplish both. We first rip off heir balls, stuff them into their mouth, and only then we lynch them… :)
Vinny
oh my, we are camping out, in the cradle of western thought.
Skippy…May I orchestrate the back ground music…http://www.youtube.com/watch?v=mJsa-qqF7uY
or
http://www.youtube.com/watch?v=EwDuC3fs0Gk&feature=related
“Can you parse the bullshit?” I really like that phrase. . .
► “Yves here. So welcome to 21st century capitalism, where management never has to admit, much the less bear the consequences of its errors. Just take it out of the hide of the little guy.”
So their Highnesses are kings and lords of these islands and land of Tierra-firme by virtue of this donation: and some islands, and indeed almost all those to whom this has been notified, have received and served their Highnesses, as lords and kings, in the way that subjects ought to do, with good will, without any resistance, immediately, without delay, when they were informed of the aforesaid facts…
If you do so, you will do well, and that which you are obliged to do to their Highnesses, and we in their name shall receive you in all love and charity, and shall leave you, your wives, and your children, and your lands, free without servitude, that you may do with them and with yourselves freely that which you like… And, besides this, their Highnesses award you many privileges and exemptions and will grant you many benefits.
But, if you do not do this, and maliciously make delay in it, I certify to you that, with the help of God, we shall powerfully enter into your country, and shall make war against you in all ways and manners that we can, and shall subject you to the yoke and obedience of the Church and of their Highnesses; we shall take you and your wives and your children, and shall make slaves of them, and as such shall sell and dispose of them as their Highnesses may command; and we shall take away your goods, and shall do you all the mischief and damage that we can, as to vassals who do not obey, and refuse to receive their lord, and resist and contradict him; and we protest that the deaths and losses which shall accrue from this are your fault, and not that of their Highnesses, or ours, nor of these cavaliers who come with us.
—Requerimiento, 16th-century Spanish document used to justify the assertion that God, through Saint Peter and his Papal successors, held authority as ruler over the entire Earth, and that the Inter Caetera, (a Papal Bull of 4 May 1493 by Pope Alexander VI) conferred title over the Americas to the Spanish monarchs.
The Requerimiento emerged in the context of moral debates within Spanish elites over the colonization of the Americas, and associated actions such as war, slavery and war crimes. Its use was criticised by many clerical missionaries, most prominently Bartolomeo de Las Casas. The Spanish crown abolished its use in 1556.
Eloquent whips satisfy the elite untill their flesh suffers.
Amendment: should read….eloquent verbose whips satisfy the elite, untill their flesh suffers.
An error?
That would be a very generous interpretation. It strains credulity to the breaking point to believe that a company the size of Kraft didn’t have specialists on M&A who went through everything financially significant regarding Cadbury. I say Kraft decided before closure of the deal they would renege on pension obligations.
Those higher-ups were well trained by the example of the US banksters. Upper management has all the rights, none of the obligations and the little people (the workers) really do not matter one bit; it’s just a matter of plowing ahead, muster some intestinal fortitude for the eventual disapprobation coming from the hoi polloi (don’t worry, it’s temporary) and screw them as hard as possible.
What these asshats don’t seem, or want to acknowledge, is that such behaviors end up giving socialism a good name.
The pit stares back up, appetite.
As I read it, I see nothing that indicates that Kraft has or will renege on pension obligations, but this is a pretty short posting for what is probably a pretty complicated situation. It is quite grotesque that the CEO is taking an extra $26M for an extraodinary job that includes such an implausible “error”. Still, a wage freeze at a time of extreme deflationary pressures and coming out of a merger that might rather have been expected to produce even heavier redundancies doesn’t seem exactly like capital punishment. A question to ask is if these workers have it within their power to make the wage freeze the worse business option for Kraft. If we stipulate that this isn’t “nice”, Kraft still needs a demonstration that not doing it makes more sense than doing it. Strikes and/or consumer boycotts come to mind.
This is why I read you.
Kraft’s management should be indicted. It is attmepting to pull the same “pension repudiation fraud” we saw at Delphi and IBM. This stinks.
) was awarded a 41% pay increase, bringing the total to $26 million for 2009 for her “exceptional role” in the Cadbury transaction, as well as her “commitment to fiscal discipline.
~~~~~~~~~~~~~~~~~~
LOL, $26 million bonus seems fiscally undisciplined.
Yes, by definition if she deserved the bonus she would’ve refused it.
Rosenfeld.
Says it all really.
“Yves here. So welcome to 21st century capitalism…”
This paradigm is not particular to this century. In fact, it has been the standard operating procedure of most, if not all, American companies for at least 3 decades and probably very much longer. The Institute for Policy Studies has more than a few analytical reports regarding this topic. Two of the most significant are linked below and should be required reading. In the first (download the PDF), they show that in 1970 the average CEO compensation was roughly 20 times that of the average American wage. By 2006, the latest data at the time, the average CEO was making more than 250 times that average American wage and, in some cases, more than 1,400 times! The quote from the second study is indicative that the trend is accelerating. It should be clear from these papers and to anyone who can see beyond the end of their nose that Americans have been cheating themselves, each other and everyone else on the planet for many years!
Executive Excess 2007
http://www.ips-dc.org/reports/executive_excess_2007
Executive Excess 2008: How Average Taxpayers Subsidize Runaway Pay
http://www.ips-dc.org/reports/executive_excess_2008_how_average_taxpayers_subsidize_runaway_pay
“The report also finds that S&P 500 CEOs averaged $10.5 million in pay in 2007, 344 times the pay of typical American workers. … The top 50 hedge and private equity fund managers averaged $588 million each, more than 19,000 times as much as typical U.S. workers earned.”
As usual, I get my morning wake up giggle, (no, not that kind) this reminds MOI of some guy whose real name escapes the recall, his nick name was “hacksaw”. He would engineer a takeover of good companies, then proceed to chop them up, selling off pieces, ending up with what some called the dregs, then would move on to another company. He was rewarded as if he were some good guy at first, then vilified, eventually leading to obscurity. The time is fast approaching when this same event will hit the American business model, for the reasons other than thought possible. Of course all those wealthy individuals that have partaken in the looting, stashed their ill gotten gains off shore, just might wake up one morning finding that their secret accounts are worthless. How so? Simple, the dollar will not be the dollar of today, for just like a lot of the so called third world countries, the dollar will be renamed, thereby making the old ones obsolete. Ah, but then they can play Monopoly, as the bankers come calling with the Sheriff, stripping the ex-rich huddled masses?, of what’s left, putting them out on the street. It won’t matter what Country they reside in, even if they have converted their ill gotten gains into that countries currency, for as with all financial endeavors, everything is copied into that “little black book” so there will be no hiding.
norman
the guy’s name that escapes you: al ‘chainsaw’ dunlap. he ‘did’ scott paper, finally winding up at sunbeam-where he crashed and burned (but not before taking the co. with him)
It should be noted that Kraft’s original plan was to screw Cadbury employees. The only thing that’s changed is how they’re planning to screw them. As such, this new strategy doesn’t represent any new low of moral deprevation by Kraft. Kraft had already reached that low in their original aquistion planning.
I have to agree with you. I can’t believe Kraft’s lawyers and actuaries didn’t understand Cadbury’s pension plan. Seems much more likely they’re using it as an excuse to squeeze pay.
There have been plenty of multi-million + dollar mistakes before in the history of business. No reason why not to think this is just another one.
Heck, what would she have gotten in a bonus if this hadn’t turned up.
Come on Yves, they knew that clause was in there. They are just trying to exploit the situation to attack the pension.
If this country were on a gold standard, would any of you readers be owning stocks at all?
I agree with the comments above the Kraft knew full well about the clauses that set up the pension plan. Kraft has no intention of paying and oh so generously is now trying to run the employees out of the company. (And if they aren’t fully vested, so much the better.) This peculiar treatment of employees and their pensions isn’t distinctly American. Years ago, I was in a company that was on the receiving end of a Murdoch takeover. One of the first things that Murdoch and George Craig (two truly undesirable aliens) did was to loot the pension system, under the pretext that it somehow violated American law (the pension plan, not their actions). Kraft is well aware of such behavior–I’m sure that they sent some lackeys off to a seminar about it.
Really, when it comes to corporate management, don’t assume incompetence when malevolence will do.
Norman Morley must be referring to Albert J. Dunlap, a/k/a “Chainsaw Al.”
Dang! So soon after Easter Sunday, I thought this was going to be a nice story about chocolate bunnies, maybe a ressurecting antidote; instead it’s about a corporate monster biting the heads off its workers.
“Yves here. Can you parse the bullshit? That “obscure clause” nonsense is a “the dog ate my homework” level excuse.”
Oh indeed, and the bullshit doesn’t smell chocolaty either—rather more than a bit nutty. This is just like Senator Dodder’s protest about how that pesky bonus protection provision managed to slither its way into the AIG bailout bill. Compounding the injury, the farcical pretense here is HIGHLY insulting!
It’s just a little “righteous indignation”.
Vinny
I am a Kraft shareholder so I have a dog in this hunt.
This was a hostile bid so there wasn’t typical due diligence in this acquistion. It doesn’t surprise me that Kraft was unaware of details of the pension scheme.
Because it is too early to know if this is a successful acquisition, I will be voting negatively in the proxy.
They just shifted $26 million from general employee SG&A to Irene Rosenfeld SG&A.
That’s $7,222 per worker.
I wonder what Che Guevera T-shirt sales are doing these days?
I do not think that Kraft has any idea of the special place that Cadbury has in the hearts of the British working class. Nor the strength of working-class membership. Cadbury were years ahead in providing good working conditions etc. The pension protection of the workers is just another facet of this. It would be easy for a boycott of Cadbury/Kraft products in the UK.
Whilst not a chocolate afficianado, Cadbury’s was always (especially the Irish factory’s versions – something to do with the milk) my choice. Was. Not any more. I can live without chocolate.
Pension “recalibration” is a well established procedure by which large corporations have captured “value” for their executives and shareholders. A company the size of Kraft along with their well heeled financial advisors are supposed to be wet-behind-the-ears with regard to this practice? Not likely. Pull the other one Kraft, it got bells on it.
Every month our household has been slowly weaning ourselves off big brand names by doing without, product replacement, sourcing locally, or growing our own foodstuffs. I’ll miss Caburys a wee bit. Kraft can go down the rapids without a paddle as far as I’m concerned. This sucker’s not playing (paying) anymore.
But you would think the UK would have some national strategic interest in maintaining some sort of large agri-business infrastructure as its other traditional industries hardly exist anymore. Strange days indeed.
blagroll can live without chocolate, but I can’t. However after many years of enjoying their product I now refuse to buy it. Lindt is a good substitute.
Please don’t tell me that Lindt is a Kraft subsidiary too!
While it’s great that blogs such as this are ensuring that Kraft is kept in the full glare of publicity, is anyone that surprised that this is going on? I don’t think anyone wanted this transaction to take place except for fee hungry investment bankers and short term arbitrageurs and other hedge fund investors who had no interest in the future of the company. Kraft shareholders didn’t even have a vote on this and they’re the ones who’ll have to live with the consequences.
What seems more interesting is whether ‘Kradbury’ will lead to long anticipated reform in the UK to finally put an end to this abuse of what is in all other ways an extremely effective framework for regulating the market for corporate control and corporate governance generally. What seems different is the focus on this new type of shareholder rather than the traditional bogeyman of City fund managers and pension funds and life assurance companies etc. who used to be consistently lambasted for selling on the cheap.
And as far as Rosenfeld being the main beneficiary of this transaction, there’s nothing new there either. CEOs and other senior executives have been consistently the only other winner of most M&A activity for as long as I can remember with the current era beginning with the junk bond fuelled LBO frenzy of the 80s.
This was a dubious transaction from the beginning and the workers always knew they were going to get screwed.