I have been working with Mike Daniels on a new book about Network Solutions and the commercialization of the Internet. Our research has included interviewing many of the people who were instrumental in the development and commercialization of the Internet — from its beginnings within ARPA, up to the point that SAIC sold Network Solutions to VeriSign.

One of the topics that comes up over and over is Internet security, and the potential threat to our national security. It was therefore with much interest that I followed Defense Secretary Gates’ announcement last week of a new Cyber Defense Command within the Pentagon.

This is good news, as the new command will presumably centralize much of our nation’s efforts to defend against attacks on our critical information technology systems as a part of the U.S. Strategic Command in Omaha. This command is currently responsible for commanding operations in nuclear and computer warfare. The goal is to get the Cyber Defense Command up and running within a year and a half.

The commander will be the current director of the National Security Agency, Lt. Gen. Keith Alexander. According to Verisign, the company — which is the keeper of the Internet’s A server — is hit by more than 2 million hacker attacks a day. Cybercriminals and terrorists — some sanctioned by foreign governments — are on the rise. I think the new Cyber Defense Command will have its hands full.

I recently learned that Russia has proposed a new international treaty for cybersecurity. I was not surprised, however, to learn that the U.S. and Russia have different priorities when it comes to drafting the proposed treaty.

While the Russian administration argues that there should be an international treaty for cyberspace, much like previous treaties for the use of chemical weapons, the Obama administration has stated that such a treaty is unnecessary. Obama’s approach would be to improve cooperation among international law enforcement organizations.

I do not know exactly what a cyberspace treaty would cover and how it would be verified and enforced. According to one article I read about this topic, Russia proposes to ban countries from secretly embedding malicious codes or circuitry that could be later activated from afar in the event of war.

In my opinion, rogue nations would be unlikely to sign onto the treaty, and even those countries that did sign the treaty could likely launch cyberattacks in ways that could not be easily detected. I am curious why Russia is pushing for the treaty, especially since the country has been implicated in highly disruptive cyberattacks on Estonia and Georgia.

Is it possible the Russians hope to disarm their potential adversaries, while reserving the right to engage in cyberwar for themselves? For some reason, I am reminded of an old story about a large, wooden Trojan horse.

– Bob

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By now you have probably heard that the SAIC vote on conversion of the preferred stock into regular common stock was approved by the company’s shareholders last Friday. Based on an announcement from the company, The San Diego Union-Tribune reported on June 20, 2009, that 85% of stockholders participated and that two-thirds voted for this change. That means that the proposal apparently passed with about 56.6% of shareholder votes.

This vote means based on reasonable estimates that SAIC’s employee-owners now have less than 50 percent of the voting power and that the public shareholders have the majority. Past experience has shown that it is very challenging to maintain majority or even significant employee ownership over time unless this is treated as a top priority.

In my book, The SAIC Solution, I pointed out four key advantages that we enjoyed over our competition because of the kind of employee ownership we practiced at SAIC. These key advantages included:

• Employee ownership allows a focus on long-term goals.
• Employee ownership helps attract and retain a superior workforce for decentralized growth.
• Employee ownership facilitates the alignment of key corporate constituencies.
• Employee ownership at SAIC promotes corporate flexibility and adaptability to maintain customer focus.

Employee ownership is important because it is fair for all employees to share with other investors and top management in the value that all of the workers created as a total team. Research now provides strong evidence that the combination of broad-based incentives like employee ownership with teamwork, performance management, and highly trained employees contributes to corporate performance and innovation. This evidence shows that employee ownership is also very good for non-employee shareholders and investors.

I have heard the theory that minority voting control and ownership by employees will unleash SAIC’s stock price. I hope the stock price does well but I want to make clear that there is nothing magical about employees owning little of a company. I believe that broad-based employee ownership at all levels was a critical factor in making SAIC so successful in the first place. I hope that the four advantages cited above don’t completely evaporate as the company’s employee-ownership culture continues to shift to one that is focused on public ownership and Wall Street. I will watch with great interest.

Blasi Speaks

I was interested to see that Joseph Blasi, a leading expert in employee ownership at Rutgers University who has done much work with us at the FED, has made some recent appearances in the media. He was quoted in an article on CNNMoney.com and he was a guest panelist on Canada’s Business News Network.

The article discusses the topic of the United Auto Workers union and its reluctance to become owner of large stakes in Chrysler and General Motors. I believe the union is not happy about having large ownership stakes in these two companies because it puts them in a conflict of interest position when they negotiate labor rights. It sounds like they will sell off their stock as quickly as possible, going for the paycheck over the equity stake.

This is a typical response of many unions, although sometimes they will agree to ESOPs. The last time I checked, there were about 12,000 companies with ESOPs, with far fewer operating with the SAIC type of ownership model. We’ll have to see what happens.

The SAIC Solution As Textbook

George Otchere visited us last week. George is an SAIC vice president in charge of small business development in Washington D.C., where he manages the company’s nationwide program. He has been using my book, The SAIC Solution, as a textbook, giving it to each of the small businesses he and his team of people mentor. So far, more than 500 books have been given out.

Last Friday I took my usual trip to Oceanside on Solutions. The weather was great, we saw a few whales, and we got there in two hours. On Sunday the family and I had Father’s Day dinner at the Beach and Tennis Club as did many other local fathers. It was great.

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We continue to work to move the book on Network Solutions and the Internet forward. For those of you familiar with the story of the origins of the Internet, you know that DARPA (then called ARPA, the Advanced Research Projects Agency) created the computer network that led to its development. I am an admirer of DARPA and the people who work within the organization to push forward defense and defense-related technologies.

* * *

The recent events in Iran have also drawn my interest. It appears that protests for and against the re-election of president Mahmoud Ahmadinejad are gaining in momentum and violence is quickly increasing, with thousands of Iranians in the streets. While it is possible that this unrest will lead to the eventual election of a president who is more interested in Iran’s becoming a responsible member of the global community, it could also be the beginning of a new wave of repression against the Iranian people. I hope that this glimmer of freedom gives the Iranian people the strength they need to rid themselves of the tyranny they have been living under since their Islamic Revolution in 1979. That would indeed be a good thing for Iran, and for the rest of the world.

At the same time, things seem to be heating up in North Korea again, with much saber rattling and threats of new missile and nuclear bomb tests. It seems to me that the world is increasingly unstable. This will present the Obama administration — which is already weighed down with the economic meltdown and domestic policy concerns — with additional challenges that will make it increasingly difficult for us to keep close attention to all of the problems we face in the world today.

* * *

Friday is the vote on the change in SAIC’s preferred stock program. I personally believe that each of the affected shareholders should contact their financial advisors and then make up their minds themselves. I made a decision on the matter, but I’d rather not tell you what it was.

* * *

Last Monday I was visited by my old friend Don Hicks, who lives in Newport Beach. I am really pleased that he and I have been able to establish a business relationship since he is one of my favorite people and he was a big contributor to the SAIC board for many years. If any of you know Don, I’m sure he would like to hear from you.

Last Tuesday I was visited by John Evey and Andy Young from the Venter Institute. They would like to use my boat Solutions for a series of monthly Pacific Ocean samplings at various locations they’ve been studying for a number of years in the Southern California Bight area. This would involved sampling trips twice a month for two years. They will be looking to see what viruses and bacteria are in the ocean and what concentrations they can detect of other biological species such as diatoms.

– Bob

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As many of you know, I am a believer in the power of entrepreneurship. It is the engine that keeps our economy growing, and it is the well from which innovation flows. Our nation would be a much different place without entrepreneurs and all the good things they do. As SAIC grew in the years following its founding in 1969, I tried to encourage the entrepreneurial spirit in our employee-owners. I think it worked for the most part. Today I continue to look for new ways to encourage the entrepreneurial spirit, particularly among the young people who are our future.

UC San Diego Entrepreneur Challenge

I am particularly pleased with the work that the Foundation for Enterprise Development is doing in this area. One of the programs that the FED participates in is the UC San Diego Entrepreneur Challenge. We are a platinum sponsor of the Challenge, and my daughter Mary Ann Beyster served as a judge for the past two years. Other judges include biotech entrepreneur Larry Bock, CONNECT CEO Duane Roth, UCSD Rady School Dean Robert Sullivan, and others.

The Challenge is student run, and now in its third year. The mission of the Challenge is to foster technological innovation through entrepreneurship, and this year’s competition offered $80,000 in cash prizes to the winners. Last fall, 70 different teams presented their business concepts to the judges, and then they participated in an executive summary competition during the winter. It is my understanding that each team was required to have at least one member who is either a UCSD student or recent graduate.

Last Monday the teams presented their business plans live, in front of the judges and an audience of more than 300 students and business professionals. The judging was done live and the results were announced shortly after the last business plan was presented.

The first-prize award of $40,000 went to Biological Dynamics, a biotech company that develops early cancer screening tools. The company’s test can detect almost every kind of cancer, even early stage cancers, within 30 minutes. The second-prize award of $20,000 went to Tritonics for its novel approach to preventing and treating clogged tubing. The third-prize award of $10,000 was given to RADIOFAST, which presented a plan to commercialize high frequency imaging microsystems for the medical and security industries. The remaining $10,000 in prize money was split into five $2,000 awards given to winners in the subcategories of biotech/life sciences, high tech/IT, social entrepreneurism, clean tech, and undergraduate.

These results tell me that both entrepreneurship and innovation are very much alive and well here in San Diego. Given the current state of the economy, that is a message we should all be very happy to hear.

If you are aware of similar programs in your area that I should know about, I hope you’ll take a minute and post the details here on this blog so I can follow up on them.

San Diego Ernst & Young Entrepreneur of the Year

The most notable event last week was the annual San Diego Ernst & Young Entrepreneur of the Year reception, banquet, and presentation of awards at the Hyatt Regency in La Jolla on Wednesday. The winners were arranged into a number of categories, including Entrepreneur of the Year, Turnaround Entrepreneur (Mary Ann Beyster and I presented the award for that one), High Tech Entrepreneur, and several others.

About 600 people attended the event. Ernest Rady received the Lifetime Achievement Award, and Malin Burnham, Walter Zable, and I were asked to stand to be recognized for our work. I feel that this year’s showing of entrepreneurs was very strong and the people recognized were obviously leaders. Those who received awards at the San Diego event will be asked to participate in the national award event in Palm Desert in November.

On a Personal Note

On Friday we drove Solutions to Oceanside to have lunch at the Jolly Roger, as is our tradition. Robert Craig, my financial advisor, accompanied us, as did Ron Arnold. No pirates were spotted, but we did see a whale or two and plenty of dolphins.

– Bob

Related Posts at Dr. Beyster’s Blog

• Russia, Local Entrepeneurs, and the Democratic Race
• Local Entrepenuers and the U.S. Open

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I would like to thank former SAIC employee Mark Allen for pointing out some interesting websites having to do with algae-based biofuels. The first site, algaeatwork.com, is Mark’s company, which is finding new uses for algae, including capturing CO2 and producing biofuels. The second site, algalbiomass.org, is a large group of government organizations and businesses interested in creating algae-based products including biofuels for use in aircraft jet engines and rocket engines. I think it’s a great idea and one that should be pursued. Once large-scale production begins, it seems to me that the pond approach to growing algae is going to prove to be the best. It might not be many years into the future that the airplanes you fly in and the cars you drive run on algae-based biofuels.

– Bob

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It was with great interest that I followed news of the General Motors bankruptcy filing this morning. It’s hard for me to believe that this company which was once America’s largest and perhaps most important has been so humbled. The company’s U.S. market share has tumbled from 45 percent in 1980 to 22 percent in 2008. I personally have always had a deathly fear of bankruptcy, I believe because of all the financial turmoil I saw during the Great Depression. This fear drove me to fully understand the details of any financial deals we decided to pursue at SAIC.

Some of you may recall that I grew up in the Detroit area and that my uncle, Harold Foss, found my father a job at the Ternstead Corporation, which was a car trim subsidiary of General Motors in Detroit. This was good timing for our family because jobs were very hard to come by at that time. I soon became a great fan of General Motors, and believed that it was the greatest and most successful company in the world — a belief I carried with me for decades. I wouldn’t consider buying a car that was anything but one made by General Motors until Ford joined us in sponsoring the America’s Cup in 1987. I still buy Ford products to this day.

It is my understanding that the federal government has agreed to provide General Motors with an additional $30 billion, and the Canadian government will pitch in $9.5 billion. As a result, the American taxpayers will own about 60 percent of General Motors and Canadian taxpayers will own about 12.5 percent of the company. In the bankruptcy filing (PDF), General Motors stated that it currently has $82.3 billion in assets and $172.8 billion in debts. I would guess that a major goal of the bankruptcy filing is to shed much, if not all, of this debt.

The new General Motors should be a much leaner and greener operation. Not only will a large amount of its debt go away, the company will let go of up to 25,000 employees, shut down 17 factories and parts centers, and close 2,400 of its 6,000 dealers. For the first time since 1925, General Motors will no longer be included in the Dow Jones industrial average, an event that I never imagined I would see. The company says it will focus on building more affordable small cars that offer better gas mileage, including new hybrid, fuel cell, and electric models. This means that new technologies will be even more important to the company. It will need to use stronger materials that are lighter in weight, it will need to create more fuel-efficient designs, and it will need to push ahead of the Japanese innovations in engine technologies. The Department of Defense has been working in these areas for some time. Perhaps there could be sharing of information by way of DARPA.

As it emerges from bankruptcy, General Motors has a unique opportunity to make its employees owners. President Obama says that he does not want the government to be in the business of running General Motors, and that his intention is to quickly remove it from the day-to-day operation of the company. Presumably once the company is back on good footing, the government will sell its equity stake or otherwise transfer it back to General Motors. Who better to own the company than its employees? Based on my experience at SAIC, General Motors’ employee owners will be more motivated and they will perform better than employees who are not owners.

What do you think? Do you think the new, improved General Motors will have a chance to thrive in the coming years, or will the company become an also-ran, much as Chrysler has become? I, for one, hope General Motors can turn itself around. But I also hope that Ford is able to capitalize on the situation and position itself for growth as the economy turns around. I am glad to see at least one of the Big Three car manufacturers had the foresight to see the road ahead, and prepare itself for a much different economic environment that we are in today. It may very well turn out that the Big Three will become the Big One, and that Ford is alone at the top among U.S. car manufacturers.

– Bob

Related Posts at Dr. Beyster’s Blog

• Cars, Hybrid Cars, and Yes, It’s Really Me
• Studies on Employee Ownership, Concern About Bailouts

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