WHY THE USTA NEEDS AN OUTSIDER CEO. By Javier Palenque

In a few weeks, the governing body of tennis in the US, the USTA, will choose its next CEO. The last one quit after two short years due to many reasons one of which is the poor governance of the organization that refuses to address it. It was simply impossible for Mr. Dowse to act like a CEO when sections have more power than he thought and when the political environment is against common sense for the benefit of the sport. Mr. Dowse was chosen as a sort of outsider of the tennis industry and the organization, and he failed to do what was needed for the game, which is to transform the USTA. Now the board of directors has a choice to make between three kinds of candidates:

1.- Choose another traditional good old boy. (Somebody that they are very comfortable with that will shake little and change nothing, but take the game to its current path, irrelevance. Someone like Mr. Dowse but that will do what they say, not what the sport needs). This seems like a loser for the sport.

2.- Choose a figurehead from the inside pool, usually, the USTA picks people who are from a politically correct group (depends on the year), and with very little business acumen, these people are happy to be selected, but lack opinions, gravitas, and a vision to make the necessary changes to the old organization. All these candidates fail to see the obvious need for a culture change and reinforce the poor culture of the organization and like to show their faces everywhere. Where I come from these kinds of people are called “seat warmers.” they particularly love the free food and perks. This is also a status quo candidate with the only difference of being a member of a politically correct group. This option is also a loser for the sport.

The revenue heads of the US Open have been doing the same job for years and no CEO can add much to that dynamic, so it is a figurehead job of sorts. So, if the CEO is timid, lame, comes from a politically correct group (depends on the year), and maybe talks funny the USTA likes this as he or she keeps the non-working status quo.

3.- Choose an outsider, this is the scariest option of them all for the board and the old boys as this person would turn the organization around for the benefit of the sport and help grow the game and benefit the greatest number of kids and adults and not the fewest. This person would be a change maker for the organization and be a breath of fresh air and youthful energy to empower the base and re-engage the tennis population with the national body. The problem with this person in the eyes of the old boys is that their little kingdoms would be challenged, and their perks questioned? Well, that can be easily overlooked you may think? NO, when you are $220M in the red and in debt for a staggering $710M for the next decade. Sorry, we need to do what is right, not what is convenient. It is also relevant to highlight, why an outsider is needed and let me remind the reader the following: The game is not growing that is why the executives hide participation numbers, which is shameful. The US Open numbers are bad as it makes no profits with $489M revenues. Now without reserves, no stock market gains can be used to hide the poor financial performance of the executives, and the sport has never been better funded than in the last decades and the results are simply horrific. These are facts, not opinions.

Looking at the dilemma from these three possible solutions, I am in favor of the one that will favor the game, grow the tennis economy, and understand where the game is now and where it needs to be. Of the three choices, it is only the outsider who has a chance to position the game for growth and grow the tennis economy. Let me explain why:

In 2012 a book called The outsiders by William Thorndike was published and received great acclaim from the elite business community in the country including Warren Buffett. This book studies eight CEO who were outsiders who outperformed the S&P by twenty times vis a vis a normal CEO. The author concludes that the best CEOs are not managers, but capital allocators. They were not charismatic visionaries who actively managed operations. On the contrary, they decentralized operations and centralized capital allocation. They rarely paid dividends and emphasized cash flows over net revenue. Granted these are for-profit companies, with shareholders and ownership that demand results and accountability. Contrast that to the setup of the USTA, which has no shareholders (it should be the sport) and is accountable to itself (a self-selected board with no real accountability) this statement alone tells you what needs to change. If it is not clear: the governance of the USTA.

Also, a concept that needs to change at the USTA is that being a not-for-profit does not mean that spending should be such that there are no profits. This is a cultural mistake reinforced by each board every two years. Wrong USTA boards! a nonprofit must make profits to serve more people for the sport. Get It?

Here are some insights from the book that apply to the USTA.

1. The best way to measure a CEO’s performance is to measure the increase in per-share value during their tenure. Gordon Smith, Katrina Adams, David Haggerty, Pat Galbraith, Mike Mcnulty, Michael Dowse all avoid the only metric that is useful in our sport: which is growth per age, gender and zip code, and ball sales.?This is because, in the eyes of the organization, it is enough to promote a PAC report with made-up numbers that no one questions and keeps hurting the game. If one analyzes this report carefully, the numbers simply do not add up. When questioned the board and executives hide. Unbelievable!
2. The two core tasks of CEOs have been the management of operations and the deployment of capital. Most CEOS tend to focus more on operations. However, two equally well-managed companies with different capital allocation strategies will have widely divergent long-term results. If we study the USTA, the capital allocation is so poor and misguided that the organization sits today with $220M in losses and debt of $710M. This is the equivalent of decades of losses for the future. Did I mention that they have no reserves, a $70M principal payment due this year, and a $200M principal payment in nine years. If that does not scare you, what does? Imagine how the noteholders must feel? Maybe they should not read this.
3. The Outsider CEOs share a worldview, which includes attention to capital allocation and per-share value, as well as emphasis on cash flows over-reported earnings, and focuses on highly decentralized operations, highly centralized capital allocation, investment in their stock, and discipline and patience when it comes to acquisitions. This philosophy is the exact opposite of what the USTA does, they want top-down control of the sport and have no accountability to anyone. This only makes sense if you are not in this world with shareholders to please.
4. The Outsiders shared personal traits like frugality, humility, independence, and an analytical approach. They avoided the media spotlight and interacted little with Wall Street. These CEOs waited for years to identify the right investment opportunity. To increase per-share value, they were even ready to shrink company size and share base. Delivering value for the customers is all that they do. But the USTA fails to see the tennis public as a customer, and this is a major failure. Focusing only on the US Open is a gross mistake. Failing to manage the sections is also a major blunder, neither grows the game, and money is wasted year after year.
5. Outsider CEOs emphasize extreme decentralization and drove managerial accountability to the lowest levels. The exact opposite of the way USTA is managed. They all want a top-down approach. Imagine if McDonald’s had no stores of their own and no contact with the public and told all franchisees what to do. This is exactly what USTA executives do, it makes sense to no one.
6. Outsider CEOs trim the fat and make the organizations efficient. General Dynamics got $2.5 billion by reduction of its over-investment in inventory, capital equipment, and R&D and decreased headcount by 60%. Again, the exact opposite of what USTA does, Mr. Dowse should have cut payroll by 50% during Covid and only did it by 20%. The USTA is still morbidly obese to move towards a better future. The excess weight must go now more than ever to be able to save to pay the notes due.
7. Warren Buffett structured Berkshire in such a way that he spent very little time on operations. He kept a blank calendar, did not use a computer at the office, and utilized most of his time to read and think. Critical thinking is what is missing at the USTA executive suite, this is the reality: The game attracts old people, and the young generations are not interested. What needs to happen so the board realizes this? all they have to do is ask their near relatives why they do not play or watch tennis and conclude that the sport is in crisis, that is all the effort it takes.

The wonderful book also mentions a particular key trait for a successful outsider CEO over traditional ones.

THE OUTSIDER’S WORLDVIEW

The iconoclast CEOs profiled in this book share an outsider’s worldview. The key elements are:

• The CEO’s main job is capital allocation, proper resource allocation.
• What matters in the long term is the increase in per-share value
• The long-term value is determined by cash flows not reported earnings
• Organizational decentralization improves efficiency and reduces costs
• Rely on independent thinking over expert opinion
• One of the best investment opportunities is the company’s stock
• Patience, with occasional swiftness in deal-making, is the strategy for acquisitions

The outsiders also shared some personal characteristics, including frugality, humility, independence, and an analytical, understated approach. Almost all of them were first-time CEOs. They avoided corporate perks and media spotlight. These CEOs were more investors than managers with high confidence in their analytical skills. They bought their stock when it was cheap and leveraged it to raise cheap capital when it was expensive. They were willing to wait long periods to identify compelling investment or acquisition opportunities. In pursuing per-share value, they were ready even to shrink their company size and share base. In other words, creating value for the shareholders. Same with tennis the shareholders are the people, the coaches, the kids, the parks, the clubs, the manufacturers. Unfortunately, due to the way the USTA is structured, and the way the revenues are generated there are no shareholders, there is a welfare mentality, no urgency for anything, and a guaranteed job for life. I would change that non-working dynamic immediately. Sorry guys it is the right thing to do.

The last point I want to make with this topic and book is this: successful businesses hire the best and leave them alone.

Capital Cities was famously decentralized, with extraordinary managerial autonomy and minimal headquarters staff. Murphy’s HR philosophy was to “hire the best people you can and leave them alone.” Burke had a razor-sharp focus on frugality and economic efficiency. He would do a line-by-line analysis of annual budgets that every manager presented. Apart from these individual annual meetings, managers were left alone.

For the above reasons and given the other two options as a choice for the future CEO of the USTA, (an old boy or a figurehead) it seems to me that the sport has one sensible choice, and it is to bring in an outsider to shake things up, create value and grow the sport. Because the other options were tried before and the institution is now with losses, in debt, and having to hide participation data to avoid shame. In the real world, a precarious situation.

Of course, for that purpose, I have created a vision, a 46-page document, and 70 minutes of a video explaining what needs to be done and how. Take a look at it and write to me with comments, criticisms or just to say hi. If it is tennis, I am game.

What will benefit the old boys and the establishment is a figurehead CEO, what will benefit the sport and the US Open is an outsider. What is it going to be? The sport? or the USTA's current nonworking setup?

My name is Javier Palenque I am an outsider, with worldviews and in love with the sport. I would like to be the next USTA’s CEO to make it the best-funded sport (this means a successful US Open) in the country with the most kids and adults of all ages playing the sport. If this resonates with you, I respectfully request your support. If you liked what I said, share it, if more people know, maybe we are all better off.

?I can be reached at [email protected]