Monday, July 30, 2007

Finalized "Plan B" for Motorola Sent to its Non-Executive Directors Today

Fellow Motorola Shareholders:

Today, I formally submitted our finalized "Plan B" for Motorola to the Non-Executive members of Motorola's Board. Over the last 3 weeks, I have received numerous suggestions from you and others like you who have been frustrated by the Company's performance and want to see a significant change versus the status quo.

These comments have come via our wiki, through private phone conversations, by email, or by comments directly on the blog. I sincerely appreciate all the ideas. Many current Motorola employees used this as an opportunity to speak up with their positive suggestions for change to make this a better Company. Our plan is much stronger and specific as a result of their input.

We now have a formal group of 126 individual investors with about 600,000 shares of Motorola stock owned collectively.

In the past few weeks, I have also spoken to a large majority of representatives from Motorola's largest institutional shareholders. Many didn't want to formally "join" our group in publicly criticizing the company (for different reasons), but they are clearly frustrated and many told me that they were sympathetic with our views. They also told me that they would be (or already recently had been) in touch directly with Motorola to express their views.

The letter below was sent this afternoon to Dean Lindroth, Corporate Vice President and Director of Investor Realtions for Motorola. I asked him to distribute it to the Non-Executive Members of the Board and to arrange, as soon as is possible, for me to meet with or speak by conference call with these Directors. Working with them, it is my hope that we can find a solution that will benefit all Motorola employees, customers, and shareholders.

In the meantime, I ask you to continue to support our group with your new pledges, provide suggestions of key Motorola shareholders to speak with, and provide us with your suggestions and observations. Working together, we can ensure that this company is doing everything it possibly can to build a successful future.

Thanks again for all of your support. Here is a copy of the letter and finalized "Plan B" sent to Motorola today:

July 30, 2007

Dear Motorola Non-Executive Board Members:

As a Motorola shareholder, and leader of 126 individual investors with a combined 600,000 shares in the Company, I’m writing to you to demand you fulfill your fiduciary responsibilities to shareholders by implementing our proposed “Plan B” solution (outlined below) for positive and much-needed change at the 79 year old American institution. Working together, we believe the ideas contained within the plan can quickly and most effectively return the Company to its rightful leadership position in the communications industry.

At the moment, there is little for shareholders and employees to get excited about with Motorola. Since January 2nd, 2004, the month Ed Zander took over as the Chairman and CEO, through last Friday’s trading, Motorola has returned 23% to its shareholders. Nokia, the #1 mobile handset maker in the world, has returned 68% over the time period. The S&P 500 has returned 33%. Motorola’s shareholders would have enjoyed a 3x return, if they had put their money in Nokia – instead of Motorola – when Ed Zander started. We don’t believe this past performance and the currently articulated strategy for a turnaround, as well as the more recent announcements in the days since the draft version of this “Plan B” first circulated on the Internet, are sufficient or acceptable. This company has a leadership and a mobile product problem which needs to be corrected today – not in 6 months from now, after it falls further behind its competitors.

Over the past 3 weeks, I’ve had the opportunity to communicate with most of Motorola’s largest shareholders, as well as several current and former Motorola employees. Well over 95% of those I’ve contacted want change and are frustrated by the perceived slow response by the Senior Leadership Team (SLT) and board to the problems facing the company. Most of these shareholders do not want to sell their shares – although seeing the stock price hit a new 52-week low is testing their patience and resolve. They also don’t want to passively wait for the current SLT to deliver on promises for change. Frankly, the last year of broken promises from the SLT doesn’t provide shareholders with much confidence any longer.

As a result, my group has banded together to demand that you act immediately in implementing several much-needed changes for the Company. Other institutional shareholders who do not wish to publicly join our group are nevertheless frustrated with the performance of the Company and are seeking changes. Several have confirmed that they are sympathetic with our views but do not wish to formally “join” our group. However, I will let them speak to you directly to express their views. I know that several have already been in touch with you in these past few weeks. Our group is working towards benefiting all Motorola’s shareholders – whether or not they are formal members of our group.

After the May annual meeting, at which several shareholders expressed their disappointment and asked for change, Motorola and Mr. Zander promised exciting new handset models in the coming weeks which would play a key role in the turnaround for Motorola’s Mobile Devices Business (MDB) and, thus, Motorola itself in the remainder of the calendar year. These models have now been released – to a tepid response from customers and Wall Street[1]. Now, in the latest quarterly results, we have been told not to expect MDB to be profitable this year and the turnaround to take much longer. Mr. Zander has assured reporters following the earnings call that he’s “working really hard.”[2] This is not acceptable.

We demand that the board to undertake aggressive changes at Motorola.

Instead of only presenting the problems facing the Company (which are numerous), our investor group wants to work with you to be part of the solution which will deliver extraordinary value to Motorola shareholders and make it a better company for its employees and customers. Below, we present the finalized version of our “Plan B” to put Motorola on a path back to its rightful place as the worldwide leader in communications. Over the past 3 weeks, we have received many suggestions and edits from supporters through our wiki, by phone, and through emails/comments which have been incorporated into this final version.

1. Ed Zander Must Immediately Leave as Chairman and CEO:

This January marks the 4 year anniversary of Mr. Zander’s hiring. Nokia and the S&P 500 have exceeded Motorola’s shareholder returns by 196% and 43% respectively over that time period. According to recent quarterly data, Motorola will drop from the #2 to the #3 position in worldwide handset sales – for the first time ever.[3] The results from the past year have been under-whelming, as the company sank to negative margins. The Q2 numbers were well-below previous expectations.[4]

We call on you to each honestly answer the following question: What has been Ed Zander’s mark on Motorola? He came with a Silicon Valley background, but how has that experience or those past ties translated into tangible results for the Company? What has he brought to Motorola that is really unique in the last 3½ years? The fact that there are no obvious answers to these questions screams why a change is needed now.

You can agree or disagree with Terry Semel’s vision for Yahoo!, but he had a vision. There is no discernible vision or articulated strategy for Motorola by Mr. Zander. At the May 31st, 2007, Lehman Brothers Worldwide Wireless & Wireline Conference[5], Mr. Zander stated: “We have a strategy: Seamless Mobility.” This concept is repeated often on the corporate website – even recently by board members[6] – and in letters to shareholders. What does it mean? How does it suggest Motorola will better compete with its rivals in its Mobile, Networks, and Connected Home divisions? If shareholders cannot figure this out, can Motorola’s employees? Many have contacted me in the past few weeks confirming they cannot. A concept (and an abstract one at that) is not a strategy.

When Mr. Zander arrived at Motorola in January 2004, he was blessed with the good fortune of the success of RAZR developed under the direction of his predecessor. He did well at marketing this hit product and was able to take credit for its success, but he did not address the underlying issues at the company around software platforms in MDB and proceeded to make a number of disastrous strategic missteps for the Company. As RAZR showed its popularity, he decided to forgo millions in profits for the Company by slashing prices, in hopes of grabbing market share. COO Greg Brown proudly crowed on the last disappointing earnings call that the Company had just shipped its 100 millionth RAZR. We would ask each of you and Mr. Brown: at what price? Now that RAZR’s run is over – and with Motorola’s share evaporating – Mr. Zander has now pronounced that seeking market share is bad and that the Company instead will go after profits. Why is what was right then, wrong now, and vice-versa?

It was only when troubles became obvious to all, at the end of RAZR's run, when Mr. Zander began to rationalize costs and accelerate plans for a next-generation of phones. It wasn’t Mr. Zander’s fault alone (Greg Brown also deserves blame, as do other members of the SLT and the MDB divisional leadership), but the buck stops with him. This should have been done after the initial release of the RAZR to prepare for the next-generation phone in the GSM space, where Motorola has traditionally made most of its profits. Instead, a huge focus and amount of resources were poured into the development of the MotoQ smartphone, as it was thought that this would be the next-generation phone consumers would want. The smartphone idea might have been correct, but the execution was poor and the initial CDMA target market small; the phone flopped. The subsequent GSM offering of the MotoQ came late behind other smartphones with equivalent technology, such as the Blackjack from Samsung.

Now, the Company’s focus must be on turnaround.

Mr. Zander does not have a track record of success in turnarounds. He has ridden the wave of upward growth in his past positions. He left Sun in 2002, just as it was in greatest need of a turnaround. It’s time to bring in someone who does have a turnaround track record.

We are also deeply concerned with the reports which surfaced in an April Wall Street Journal article[7] that Mr. Zander allegedly said: “I love my job. I hate my customers” in response to a question about why Motorola’s carrier customers were discounting the prices of Motorola’s phones. He later apparently suggested that, one day, he was going to use that line as the title for his memoirs. Motorola tried to defuse this story leading up to the May 7th annual meeting, by stating the company and Mr. Zander care about their customers. Everyone makes mistakes, but, in our opinion, this episode suggests arrogance or at least poor judgment that (1) Mr. Zander would actually say this and (2) he would be contemplating possible titles for his memoirs. According to research done by Dartmouth Tuck Professor Sydney Finkelstein (who is also a colleague), corporate and CEO arrogance is a critical reason “why smart executives fail”[8]. We believe that, although not the sole reason, this poor judgment or arrogance, combined with failing to articulate a strategy, failing to prepare the organization for the end of the RAZR wave, and – most importantly – the under-performance of the stock compared to its rivals are the main reasons why Motorola shareholders would benefit from new leadership at the top.

A final note on this first point: we call on you to immediately renegotiate Mr. Zander's severance package to ensure that he does not receive $30 million simply for leaving the company in its current state of disrepair after these ill-fated last 3.5 years. He has already been highly compensated for under-performing Nokia and the S&P. A $30 million severance package would be an insult to all Motorola shareholders and must be eliminated as a measure of good faith that Motorola's employees and shareholders will not pay the price long after Mr. Zander's tenure has ended.

2. Replace Judy Lewent, Nicolas Negroponte, Samuel Scott III, and Dr. John White on the Motorola Board of Directors:

All Motorola shareholders had a sense of déjà vu watching what happened with RAZR, as Motorola has lived the story before of riding the wave of a hot product without sufficient heed to where the industry is moving to. Ten years ago, it was with StarTAC: the “iconic” hit phone, which was analog-based. All the signs pointed to the industry moving to digital. In fact, as Motorola licensed its digital technology to its competitors like Nokia at the time, the Company could see first-hand through quarterly royalty payments just how quickly this shift to digital was happening in the market. However, the Company did not act on the data in front of it and its plans for digital phones were delayed, so that additional resources could “feed the beast” of StarTAC. The company almost drove off the precipice as a result. Fortunately, for its customers, employees, and shareholders, it pulled itself back from the brink. If we substituted the words ‘RAZR’ for ‘StarTAC’ and ‘3G’ for ‘digital,’ we would effectively be retelling the StarTAC episode as exactly what we’ve just lived through with RAZR. Why have Motorola’s shareholders been condemned to have unlearned Company lessons of the past revisited on them?

Chris Galvin, the former CEO and grandson of Motorola’s founder, is no longer around. However, 4 of Motorola’s current board of 13 were around. Judy Lewent has served on the board since 1995. Nicolas Negroponte has been on the board since 1996. Dr. John White has been on the board since 1995. And Presiding Director Samuel Scott III has been on the board for almost 15 years.

In the wake of Sarbanes-Oxley, a lot of attention has rightly been paid to the issue of board “independence.” We agree that it is a good thing to have directors who are sufficiently vigilant and will ask hard questions of management. Yet, we question how “independent” you can be when you’ve served on a board for over a decade? Meg Whitman, CEO of eBay, famously said that no CEO should stay in the same job for 10 years or they risk becoming stale in the saddle.[9] We agree and think this same benchmark should apply to all corporate directors for the sake of fresh eyes and energetic vigilance.

One argument a defender of keeping a director on the same board for over a decade could make is that: it is critical for retaining some “institutional memory” in board discussions. Presumably, these longer-serving directors could remind their shorter-tenured brethren about organizational mistakes made in the past that shouldn’t be repeated – such as StarTAC. We thank Ms. Lewent, Mr. Negroponte, Dr. White, and Mr. Scott for their extensive years of service, but Motorola needs new independent directors with strong business and communications experience. We call on these 4 individuals to drop their directorships with the Company immediately.

3. Appoint Edward Lampert to the Motorola Board and Others with Deep Communications Experience:

As mentioned above, the Motorola board has – in the past – chosen to appoint directors with an abundance of experience outside Motorola’s core communications markets. While we don’t advocate a board only consisting of industry veterans, we believe a solid majority of directors should be experienced within the markets in which Motorola directly competes, rather than – for example – from the pharmaceutical, consumer packaged goods, agricultural, and academic worlds. Therefore, we suggest replacements for the 4 people named above reflect this. New Motorola director David Dorman who is ex-AT&T certainly has communications experience.

Strong business experience and a track record of success are also important criteria for a director. So is the psychological importance of owning a meaningful amount of stock in the company (which a director has directly purchased, as opposed to stock ownership through stock grants or stock options received as partial compensation for board service). We note that 10 out of 13 of the current Motorola directors own less than 50,000 shares, with 4 directors owning less than 5,000 shares (and we suspect that most of these holdings came through received stock grants or exercised stock options, rather than digging into their own pockets to purchase stock). In our opinion, that is simply not enough “skin in the game” for a corporate director of a Fortune 50 company.

One candidate that we believe fits the bill for a strong track record of business experience, as well as Motorola stock ownership, is Edward Lampert of ESL Investments Inc. His credentials are impeccable. Mr. Lampert also disclosed he is now a holder of Motorola stock following the May annual meeting[10]. We suggest that Motorola make a spot available for him immediately at the board of directors’ table.

4. Reduce the Size of and Insiders on the Board:

Regrettably, the board now has 3 insiders on it: Ed Zander, Greg Brown, and Tom Meredith. Mr. Meredith was initially an independent outsider, but is now clearly an insider - working closely with Zander (as any CFO must with a CEO). In our view, at a time when the current management team has under-delivered to shareholders, only the CEO needs to serve on this board - defending the status quo moves of management. The rest of the board should be outsiders with truly fresh perspectives pushing management. The board needs to reduce this imbalance immediately.

Adding Greg Brown to the board at this time, we believe, sends the message to shareholders that this board is committed to more of the same - not holding management's feet to the fire. Mr. Scott III, Motorola’s Presiding Director, defended naming Brown to the board by saying: “Greg will provide invaluable perspectives to the board on the key opportunities and challenges of our global business.”[11] At any board meeting, it is possible to invite any member of the management team to sit in and present on key strategic issues. You simply don’t need to name someone a director to tap into those perspectives.

Additionally, this board (now at 13 people) is too large. Research has found that, when boards get larger, there is less discussion and debate.[12] The larger group seems to inhibit more active discussion and "devil's advocacy." Instead, more "rubber stamping" of decisions put forward by the Chair/CEO/Presiding Director occurs. No one would say Motorola’s board needs more rubber stamping.

One final observation on this point: at the moment, Nokia has 11 directors, and Microsoft has 10 directors. Why does Motorola need 13? We believe this board should have 10 or fewer members.

5. Outline Motorola’s Strategy and How You Will Add Exciting New Products:

In the May Lehman Brothers speech, Mr. Zander said a company’s strategy shouldn’t change year to year, but its tactics should. We couldn’t agree more. However, the stated Company strategy is simply “Seamless Mobility.” A recent analyst who has analyzed the clarity of Mr. Zander’s letters to shareholders for the last few years, according to the Wall Street Journal, called them “Bafflegab.”[13] A notable quotation from the 2005 Motorola annual report letter cited is: “Motorola's going to own Seamless Mobility, where today's hottest technology is converging -- where the Mobile Me lives -- where mobile broadband means everything everywhere and anything anywhere." A new clichéd term Mr. Zander is fond of using – and we suspect he’s used it more than a few times in presentations to you – is “profit pools” (as in “we’ve got to find the profit pools”). Three and a half years into his tenure, the company and its shareholders desperately need to better understand the strategy for turning things around.

The recent attack which Motorola directed at Mr. Icahn leading up to the annual meeting was – in our opinion – a smoke-screen. By asking shareholders to focus on the number of directorships currently held by Mr. Icahn, Motorola’s leadership avoided having to better explain its own strategy for the company.

A long-term vision and strategy is not cost containments and site rationalizations alone. Controlling costs is obviously critical when your major division is seeing sales recede as much as they have in the last year (and some of our supporters suggest Motorola could benefit from further axing generous travel policies where multiple Motorolans fly to the same meetings and any flight over 5 hours qualifies you to fly business class). Yet, no company shrank itself to greatness. The simple truth is that customers do not like the current line-up of phones and there needs to be a better strategy for more compelling phones that will raise revenue.

Getting 18 new models out to market this year to lukewarm response doesn’t fix that problem. The RAZR2 is 10x as fast as the RAZR and has an armload of new features, but potential customers don’t seem to care. In our opinion, none of the models is a game-changing device that will sweep up the consumer or business space. They are incrementalist improvements on past styles. Recent excitement over competitors’ new product launches makes the differences all the more stark. So, what must the new strategy speak to? Next-generation designs.

When you first saw the Chrysler 300C, you turned your head; and you have designer Ralph Gilles to thank for it. The RAZR made this initial impact, and the beloved late Geoffrey Frost (former Motorola Marketing head) played a key role in this. Yet, RAZR2, KRZR, ROKR, RIZR, and the Q9 now appear to be so yesterday.

Management is fond of talking about finally developing Linux/Java platforms to make richer software experiences, and better competing with Nokia and others in certain tiers of the market in which Motorola doesn’t play. Yet, I was recently told by one Motorola employee that the Company’s Linux/Java platform wouldn’t be available until 2009 at the earliest, in part due to relocating work on this from Urbana-Champaign to Beijing. And only recently did Motorola hire a Chief Architect for its software platform, after this role remained vacant for too long. Small wonder that no one was able to speak with accountability on how the software platform was to progress across the Company.

But this focus on the software platform – important as it is – masks the fact that customers care little about Linux/Java; they want to have a user experience which allows them, once again, to fall in love with Motorola devices. The user interface and product design “know how” for this is already in house, as Motorola has an extensive Labs group. However, the processes and structures need to be put in place to get them to market. And product marketing people need to be given authority to champion these new products. The status quo of operations is not bringing them out.

The RAZR phone was developed by a small, cross-functional group outside Motorola’s standard processes. Since Mr. Zander has joined Motorola, the bureaucracy appears to have grown – not decreased – according to some Motorola employees I’ve been in touch with. More time should not be spent on generating paperwork than actually developing the product.
Corporate strategy also has to be more than just Mobile Devices strategy. With so much attention being paid to problems in Mobile Devices, what strategic focus and resources are being applied to the other businesses? What Motorola investors want to know is what they can expect from the Networks and Connected Home businesses as part of their MOT investment in years to come. What was the rationale for keeping them and jettisoning the Semiconductor business a few years ago? How will Connected Home effectively compete in the years ahead? Where is Government/Public Safety going? Are we prepared for 4G?

Several of our supporters have asked simply why these 3 businesses need to be knitted together at all. The Networks and Connected Home businesses (with $13 billion and $5 billion of annual sales respectively) have been independently successful with attractive margins. As there appears to be little knowledge-sharing between these groups, should they be broken up to extract more value for shareholders. If not, why not?

The process by which Motorola followed for getting out of the semiconductor business demonstrates poor portfolio management and long-term planning on the part of those in Corporate responsible for these choices. Here’s a quick review of what happened. The decision to spin-off the Semiconductor business was announced in October 2003[14]. The IPO came in July 2004, delivering $1.5 billion to Motorola shareholders[15]. The decision was defended as a way for the company to “focus” on its core businesses and increase shareholder value through the spin-out. Yet, Motorola continued to work with Freescale (the newly named spun-out entity), as if it was a business it owned within the Motorola family, sole-sourcing chips for many of its phones. Part of the recent downturn in MDB is due to the fact that Motorola has been producing phones at a cost disadvantage, because it hasn’t multi-sourced silicon from other vendors two years after the Freescale IPO. This risk should have been identified and baked into the corporate strategy by head office well in advance.

6. Give Motorola’s Culture an Inspirational Transfusion:

If you are not aware that this Company has a significant cultural problem at the moment, then you have not sat down to chat with some of its greatest employees. The biggest barrier Motorola faces to righting the ship is not moving some numbers around on the corporate Balance Sheet; it’s winning back the hearts and minds of its own people. As an investor, I was aghast at how much of a disconnect appears to exist between this Company’s leadership and the people they purportedly lead.

Confusion, cynicism, and fear appear to have taken root following the recent rounds of layoffs. At the same time, the employees who drive this company forward feel betrayed by a SLT. At times, they feel blamed by the SLT. This fear and mistrust obviously discourage innovation. Several employees complain about a death by 1000 committees mentality strangling product innovation.

At its core, Motorola is still an engineering company. This must evolve. Product marketing needs to be given more authority to ensure Motorola’s customers get the products they want – not the features only a few engineers want.

How do you inject some life and hope into this culture? Removing Ed Zander will not change the culture overnight, but it is a necessary step. Hiring a capable successor is equally, if not more, important. Look at HP under Mark Hurd versus Carly Fiorina. The differences in the Company’s culture are palpable when you talk to people there today. No HP director would say they should have waited longer before letting Ms. Fiorina go. Just the opposite. The same is true here at this time, which is why Mr. Zander must go now.

I request to meet with you at your earliest possible convenience to discuss our plan and the merits of implementing it. We must move past the mistakes of the past and take the steps now to make a better Motorola.

Let me be clear: our investor group doesn’t believe there is a quick fix for Motorola. Replacing Ed Zander alone is not the solution; it will require a multi-pronged effort. In our view, investors, working with the board and the new SLT, need to take the long-view and dig in for some difficult work ahead. The changes must start now though. Our group is made up of long-term investors in the company who are committed to seeing it return to its rightful place of industry leadership. A stronger Motorola is good for its shareholders, customers, and employees.

The time is now. This is a great company that can be and will be again.

Sincerely yours,

Eric M. Jackson, Ph.D.


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Anonymous said...

The correct model is Chrysler 300C, not S300.