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Hoffer Kaback
President
Gloucester Capital Corp.

Alignment Strikes Out
This screwball notion never stood a chance — at least not with Yankees manager Joe Torre.

By Hoffer Kaback

In October of last year, the New York Yankees offered manager Joe Torre a contract for 2008, providing for a base salary of $5 million (vs. $7 million the previous year) plus “incentives” of $1 million a pop should the Yankees win the American League Division Series, the AL Championship Series, and the World Series.

Concluding that he had been insulted and did not need financial “incentives” to motivate him to perform his duties, Torre rejected the offer.

This situation from the sports world resonates in the corporate governance realm. It demonstrates some of the ways in which the popular dogma of “alignment” stands on brittle glass.

Alignment proponents demand that a company’s directors have their directors’ fees and net worths tied directly into the company’s share price; the board, they insist, must “eat its own cooking” — even though it should be obvious that numerous factors, having nothing to do with how smart or honest the board may be, can and do affect the stock price.

Through its Torre offer, Yankees’ ownership in effect contended that a baseball manager’s excellence and ability should be measured by whether or not the team wins in the post-season, and that, therefore, his compensation should be directly linked to such results.

I have for years written about alignment and endeavored to point out its many infirmities. The Torre situation is but another example of how alignment (whether tied into postseason baseball results or stock price levels) falls of its own illogical weight:

1. Not long ago, there was neither a Division nor a League Championship Series in Major League Baseball. There was only a 162-game season, directly after which the teams from each league with the best record met in the World Series. Playing in the Series did not depend on first surviving a three-of-five short series followed by a four-of-seven series, in each case against an opponent that had played inferiorly over the season as a whole.

Which is a better indicator and measure of a manager’s skill — (a) his success in managing throughout an entire season (with inevitable team and individual hitting and pitching slumps) or (b) whether or not his team wins three out of five games in one particular short series?

In reflecting on this question, observe that even if the team’s pitching ace has bad stuff and is shelled on three different days during the 162-game season, those three games represent less than 2 percent of the season; but if that same ace has bad stuff in just one game during a (five-game) Division Series, that represents 20 percent of that series — and 33 percent of the games the team needs to prevent the other team from winning.

Is the quality of an individual pitcher’s stuff on a given day something for which the manager should be directly accountable?

2. A player who hits over .300 is acknowledged to be an excellent hitter. The highest lifetime batting average in the history of baseball is .367. No player since 1941 has hit .400. Pitchers get hitters out far more often than hitters get hits. Trying to hit a baseball against major league pitching is, probabilistically, a monstrously losing proposition. The records of Ty Cobb and Ted Williams prove that. What player today would not thankfully embrace a two-thirds failure rate for his career at-bats — because that would mean he is a .333 hitter?

With two outs in the bottom of the ninth of Game 5 of the Division Series game, should a manager’s Torre-esque $1 million “incentive” (alignment) compensation be dependent directly on how the particular hitter then at the plate performs during that one at-bat? Is the manager’s ability as a baseball manager really related to the outcome of that event?

3. With two outs in the ninth inning of the seventh game of the 1962 World Series, Willie McCovey of the Giants, in whose hands a baseball bat resembled a toothpick, hit a vicious line drive. It was caught by Yankees second baseman Bobby Richardson. Had McCovey swung a tiny fraction of a second earlier, he would have pulled the ball more, it would have gone for a hit into right field, and the Yankees would have lost the Series.

Had then-Yankee manager Ralph Houk been subject to the “incentive” arrangement demanded of Torre, and had McCovey swung earlier, Houk would have lost $1 million — even though he had taken the Yankees to two straight World Series in his first two years of managing (and would do so again in 1963). How, exactly, would alignment-types make a logical argument that the path of this particular line drive (either into Richardson’s glove or into right field, depending solely on at which millisecond McCovey swung) directly related to Houk’s managerial skills for the 1962 season?

4. In the 1960 World Series, the Pirates beat the Yankees in the seventh game principally because an easy grounder struck a pebble in the infield and hit Yankees shortstop Tony Kubek in the throat. That then-Yankees’ manager Casey Stengel should have been fired after the 1960 season for reasons other than the Series loss is not here relevant; the point now is that that postseason loss was due not to Casey’s managerial skills but to the Forbes Field groundskeepers. (Absent the pebble, the Yankees would surely have won, despite Casey’s wrong-headed pitching rotation.)

Joe Torre should be admired for refusing to participate in a misguided exercise in “alignment.” It is past time for Corporate America to stop swinging at this same screwball.

Hoffer Kaback is president of Gloucester Capital Corp., New York, and has served on several boards. He is the lead columnist (“Quiddities”) for Directors & Boards. He can be contacted at hkaback@directorsandboards.com.