Session 3: The Real World Strikes Back - Corporate Governance

okay folks I I think they they did some good things to the audio so you should hear me much better today before I get started couple of very quick well know one is a comment the other is a question how many of you and consider this an ongoing question I'm going to ask it of you simply because I want to be aware of whether youve picked a company how many of you have picked a company to do your Corporate Finance analysis already Okay so we're moving in the right direction only thing I'll ask you is if you haven't picked a company don't wait too long part of the reason is this is an ongoing project as I talk about the board of directors at Disney I want you to look at your company's board of directors to decide if it is in fact a board that will keep an eye on the management okay second I I should have mentioned this at the in the last class but I did not when you pick a company there are two groups of companies I want you to avoid one is avoid money losing companies it's not because they can't you can't do corporate financial analysis but you're going to very quickly run into a dead end here's why if you have a money losing company that's been losing money for an extended period and ask you how much should it borrow don't think too long what's the answer what should the answer to that question be don't borrow the fact that they have debt might be a problem but the fact is they shouldn't borrow money and I ask you how much should they pay in dividends don't pay dividends in in effect Corporate Finance gets very quickly styed after the first section so avoid money losing companies so I know some of you will override this in week 12 you're going to come and say my return on Capital looks negative of course it's going to look negative you're a money losing company and there's not a whole lot you can do so try to avoid money losing companies second don't do banks okay so don't pick a bank to analyze not again because you know Corporate Finance doesn't matter at Banks but because they're hyper restricted in what they can do in terms of investing financing dividends you're going to be moving in these guard rails that are so tight there's not much room for you to run if you want to do a Financial Service Company make it PayPal right but be careful because with financial service companies you have to be aware of the regulatory overlays in order to do corporate finance you can't just do a you're doing kellogs you can do whatever you want nobody regulates conflicts right so want to borrow money Gord and borrow money you want to pay dividends but you doing City Bank you don't have those that leeway so avoid money losing companies avoid Banks and in general financial service companies just beware somebody did ask me about Real Estate Investment Trust is there is that person in the room REITs okay so tell me what makes REITs unique and different from it they're publicly traded they stock price tell me what makes REITs unique and different first is it created by the special law in the early' 70s where first on investing what are re required to do they have to invest only in real estate read that investment technology is already off the table you can't do it so investing you're restricted in terms of dividends what are they required to do they have to pay out 90% of their earnings as dividends you think this is terrible in return for all of this what do they get they get a benefit otherwise you always create a real estate Cor coration what is it that Reeds get as a benefit over real estate corporations they pay no taxes and if you pay no taxes it turns out borrowing money doesn't make sense so if you want to do a re walk in with open eyes because you're going to see insane amounts of dividends you're going to see if the re makes sense very little debt at the re level there might be the real estate you know the actual properties and in terms of investing all you're going to see is real estate don't be surprised why aren't they going to some growth business you can't do it you're restricted so in general if you pick a company with significant restrictions around it it's okay but recognize that those restrictions are going to come into play when you think about what to do with your company so let's go back to where I left you with the Disney's horrifically bad the worst board of directors I've seen I wouldn't say in my lifetime but you know in in three decades full of insiders the CEO is the chairman of the board and even The Outsiders are not that defective they don't show up incidentally I talked about Sydney poer he headed the compensation committee at Disney and he was the top 10 list of directors who didn't show up at MX what happens if you have this is a rubber stamp board you know what a rubber stamp board is whatever the CEO says the board rubber stamps if you have a rubber stamp board think of what's going to happen you're going to see the company do things and as a share say why would they do that and with Disney this played out again and again in the 1990s one of the reading suggestions I had not that you have a whole lot of time to read is this book called Disney Wars read it if you get it's an amazingly fun book to read to show you how at the top of one of the largest companies in the US you can have a soap opera playing out and here's how the soap opera played out in 1986 Disney was in shambles as a company it was still living on the fumes of Walt Disney who had died in N the late 60s right it was a company that couldn't quite figure out what to do with itself so Disney hired a new CEO it actually went to Paramount which at that time was a much more successful company and it hired Michael Eisner from paramont and Eis did not want to leave Paramount because Paramount was successful Disney was not they gave him enough of a pay package and he said well if I'm going to come along I've got to bring my personal assistant along you're saying what's the big deal about a personal assistant the days before your iPhones your personal assistant ran your life for you they told you where you lived who your wife was when her birthday was basically or your spouse was and Disney said okay you can bring your personal assistant with you that personal assistant did not want to come to Disney either so to get him to come Michael Isner promised the personal assistant that he would have a division he could had he could become a head of a division that personal assistant's name was Jeffrey kenberg he came in and true to form Eisner gives him a division that he thinks is going to crash and burn the Disney animated movie division which had 1986 really had no life left in it they produced what fox in the hounds in the early' 70s nothing no hits so Jeffrey kenberg becomes head of Disney animated movies and the rest is they say is cultural history that little mermaid Lion King basically you know you hit after hit and by 1992 Disney animated accounted for a third of the profits at Disney as a company in any business class if you have a division head who's doing a really good job and that division now accounts for a third of the prophets what would you be talking about doing giving that person more responsible moving them up the ranks that was an EA's reaction he went to the board and say you got to get rid of this guy now if this were an effective board what's the question you ask him this guy is the most successful divisional head you have why would you want to get rid of him and the answer was very simple he viewed kenberg as a threat to the throne and through the form the board rolls over and says okay there's one problem though to get kenberg to come to Disney eisa gave him as part of his contract the rights to 3% of the revenues or earnings on these animated movies that he produced I want you to stop and think if you got 3% of whatever money is made every time the sea witch sink you would never have to work a day in your life right incredibly lucrative contract so the board somebody in the board with a brain still left says but what about this 3% you promised him you know and EA says don't pay him so on what basis I don't like him this is not a good legal reason to not pay somebody so of course cats andberg Sues and the the case didn't last very long the judge got Eisner on the stand and said Mr Eisner why are you refusing to pay Mr kenberg and Eiser says I don't like him and the judge says no I don't think that's a contractually reason for breaking a contract you got to pay him $150 million and Disney paid kenberg $150 million to go away you know what kenberg used the 150 million for he used his SE seed money to start Dream works we guys watch the Shrek movies notice how they get these barbs against the Disney movies Sleeping Beauty as an addiction problem in the Shrek movies know Snow White hangs out with seven perts in a hut you know basically he's say what's going on here this is the history playing out Dream works when it started had one objective which is hey we're going to get you Disney you say one mistake you know why are you jumping down the boat's Road you'd learn from your mistake right you would you know what Disney did next they went out and hired Michael Ovitz to come into the company as top manag anybody know what Michael Ovitz is what Michael Ovitz did before Disney hired him he was one of the leading agents in Hollywood for actors for so you put an age I mean let's face it you know you you age do something very well but they don't really run entertainment companies they negotiate big contracts for the people and he was very good at that he came in and initially e gives him responsibilities and two years later he goes back to the you got to get rid of this guy too and to get rid of Ovitz Disney had to pay out another 150 by now this is becoming a pattern right in fact I would suggest going to work for Disney making eisa really pissed off getting fired and getting 150 million this looks like a good way to get rich but each time it happened the Wall Street Journal would run an article why is the board not acting up and all you had to do is look at who was in the board to see why it wasn't acting up now it wasn't just me that basically decided that Disney was not was not doing its job you know in the one of the first activist funds you know what an activist fund is most funds when the investors move on when they don't like the way companies run one of the first activist institutional investors in US was the California Calpers which is the California employee pension fund now if you work for the state of California you don't get Social Security how do I know my daughter works for the State of California as a teacher she doesn't get Social Security say this is terrible you put your money into a pension fund that is supposedly managed by California state and instead of Social Security you will get paid from the fund so this is a big deal right these are you know firemen policemen people across the state of California and early on C Calpers would did its job well they said we're managing people's livelihoods and their pensions we got to do a good job we can't afford to just sell and move on they were they were the largest state pension fund in the country and they were one of the first funds to say we're going to stop and ask questions in fact one of the very simplistic very first measures of board efficiency they has three questions first is very and this is very basic governance are the majority of the directors outside directors remember in the in the 90s there was no requirement on inside versus outside second is the chairman of the board independent of the CEO which is another way of asking is the same person which case you're definitely not independent and third are the compensation and audit committees entirely composed of Outsiders one company failed all three tests in 1997 that of course was Disney piling on Business Week actually rank companies in terms of worst to very best boards in 1997 so this is the list of the worst boards guess who's on top Disney guess who's close behind AT&T it's tough to remember a time when AT&T was one of the largest most dominant companies in the US those company but in the 80s and '90s AT&T had this objective of making themselves smaller and less dominant over time and they actually made choices based on that their border second in the list so 1997 Disney's board was a disaster so I wanted to look at how much had changed so I'll come back and talk about what Disney looks like today but this is what Disney's board looks like today on a surface level it looks much better first instead of 7 members it's 12 it's more diverse and let's face it diversity in you know in your board can lead to more questioning maybe and you know Bob ARA sits there but you know he's been a director he's no longer chair I don't know whether he is chair of the board but he was briefly at least not a chair of the board this looks like a much better board right I'm going to argue that this board competes with a 97 board for worst board ever and I'll tell you why I think that is and I'm going to emphasize that because since the 1990s much of the Revolution or reforms in corporate governance have been driven by we've got to make boards more independent and effective but it's become checkbox corporate governance you know what checkbox corporate governance is you look at how Corporate governance scores are based they look at how many directors do you have around 11 that's good so companies have the board of directors around 11 more diversity in the board good check it off this board this is performative Corporate governance in other words we're going to look like we have an effective board but nothing's changed this is why fixing corporate governance is so difficult it's not just check check check you got a more effective board and I think we need to have a debate at least about how do we create more effective boards this ain't doing it so as you look at your company at first sight in fact not only will they have a board that looks much better than the Disney board they'll have 20 pages on corporate governance principles that they follow the longer that section the worse corporate governance is as a company so let's look at what happens when you do this and I'm going to take a pause and ask you to take a look at your board of directors and ask some fundamental questions about it first just look at the composition of your board who's in your board how many people inside as Outsiders is the brother of the CEO on the board that's usually a red flag right second look to see whether there are any external measures of corporate governance don't trust them further than you can throw them okayy Yahoo finance if you look under you find your company you click on profile at the very bottom list out how they rank the board they actually don't with they board institutional shareholder services that does this ranking it's become a scoring system so at least get a starting point but the question you should really be asking is how effective is my board not how does it look but how effective and what would give away the effectiveness of board are they pushing back at the CEO is there a big decision that the CEO pushed for that the board said don't do it boards are supposed to be a check on the top management they're supposed to slow the top management down when the top management gets you know gets into its head that it wants to get something done that's what you're looking for it's tough to find very few companies have it but that's an effective board question looks like it's on for me I see 24 participants on it so so maybe it's on their side thank you for letting me know so any questions about board Effectiveness so let's talk about what happens when the board has little or no power so so you're the CEO of a company you have a board of directors that effectively has little power over you and you know it you know what you're going to do and this doesn't make you a bad person you're putting you're going to put your interest over shareholder interest you're going to treat the company's money as your own and here are some manifestations these are things that you see at companies we look and said really who you doing that for let's start with the first one it's called Green male you know what green mail is it's just like blackmail but it's a lot more money and it's legal see here how it works I'll take you back to the early 1980s when green mail became most widely used now 1983 oil company in California unal was targeted by an activist investor called T-Bone picket it's a legendary activist investor so you're going to be the top management at Union oil of California and I'm B pickets now remember you've had if you're an oil company CEO top management you've had a decade of doing nothing in your profits went up why because oil prices kept going up you had a good easy decade is so it's you live in brenwood California great nice house you wake up at 11:00 in the morning why what are you going to do getting into work early the oil price is going to go up anyway and while you're having your coffee you read a new story that t Bo Pickin his targeted Union oil of California in a hostile acquisition what's the essence of the word hostile in a host in that hostile acquisition what does it tell you about the investors endgame here what is he planning to do basically he's going to fire you now forget about structural changes who cares about the organization all about you you your brood house is now at risk so you jump in your car you go into work and top executive meeting has been called everybody's in attendance and what's the there are two things you can do at that meeting one is you can say we have to do the right Corporate Finance saying this guy is offering $25 more than the current stock price our objective is to maximize stockholder wealth we'll sell the company that's option one option two is you say you know what you'll make this guy go away and they did they went to Boon pick and who spent $100 million to acquire 5% of the company the reason you had to make a public announcement was because when you get to 5% of shares the SEC requires that you re reveal your intentions what do you plan to do do you just plan to own 5 to 10% do you plan to take over the company and he says I plan to take over the company they went to Boone Pickin and said you spent $100 million buying 5% we'll pay you two 200 million to go away and blackmail you pay off a blackmailer the only problem is he or she comes back for more right here lawyers are involved they make sure that this doesn't happen by making this particular chir sign what's called a stand still agreement effectively saying if you take the 200 million you can't come back tomorrow with another 5% and repeat this process again at least they were thinking through that they pay 200 million Boon pickings goes away now I've never understood how a CEO of a company you can get get in front of shareholders of a company and tell them that you did it for that I'm going to try your Disney your unel shareholders I'm the CEO and say I did this all for you I took $200 million of your money remember this wasn't managerial money shareholder money and I paid off Boon picket to make sure you did not get a stock price 20 20% higher than the current price and you can say you did what to do what let's be clear the only group that's protected from Green mail by by paying green mail is incumbent managers let's at least be honest about it this has nothing to do with shareholders so that's green mail second golden parachutes so when one thing that has always troubled me about m&a is this weird mix of James Bond movies in medieval times if you notice this there are white nights and golden parachutes and poison pills and B basically things you expect in a spy movie and and medieval Time Medieval Times you know what golden parachutes are this is top management going to their lawyers after they've been targeted and this is key after they've been targeted in acquisition and putting in Clauses into their contracts that say if the acquir wins we get paid 20 25 $30 million a piece the case of Revlon collectively the manag at Revlon put in Clauses that cost 500 millionar you're saying that's why should I care as a shareholder in revon you know why you should care because the acquir will now pay less because he had or she has to pay the half a billion to the managers again nothing to debate here go do go golden parachutes help a group yes it's in combat manag nothing to do with shareholders poison pills poison pills are things you introduce into a company that make it unpalatable to an acquire I'll give you a couple examples in the in the the I think until a decade ago they might have eased this rule the FCC had a rule that a company could own only one TV station in a city or or an area so if you owned a TV station in New York you could not buy a second TV station in New York so let's say you're a company which is being targeted and acquisition I'm the com I'm the company trying to acquire I own a TV station in New York you know how you stop this acquisition right after I Target you you go buy a TV station in New York then you go to the FCC and you can't allow these guys to take us over it'll break the law perverse because you're paying more than you should you're doing it explicitly to stop an acquisition here's another example you know how a rights plan works it's it's common in Europe it's not that common in the US somebody want to describe to me what a rights plan allows you to do you get the right to do something obviously what is it that you get the right to do in a typical shareholders rights plan you get the right to buy additional shares in the company based on your shareholding at a price well below the market price so let's say you have a stock that's trading at $10 I give everybody your all shareholders in the company the right to buy additional share for every share you own at $5 per share you see that's terrible that's discounting the share price it doesn't matter right because you pay it effectively the shares afterwards might be worth only eight or $9 but everybody exercises the right it's a in fact it's a most cost efficient way to raise new Equity rather than issuing new shares we'll talk about Why Us companies are reluctant to do it that's a typical rights plan here's the poison pill version of that rights plan poison pills version I create a rights plan where stock price at $10 I give you the right to buy an additional share at $100 per chasing why would I want that I'm not going to use it as long as I run the company but in the event of a hostile acquisition guess what happens to the right's price it goes from $100 to $1 effectively it's useless as long as I run the company but the minute somebody tries to acquire the company it blows up in their faces if you're struggling with both those examples I'll give you a third example to illustrate what a poison pill truly looks like have four kids they have all grown up now but I have three sons and a daughter my daughter is third in line to the throne there is no throne but she if there were Throne she'd be third in line so this was when I had only we had only three kids I would take them out for breakfast or brunch the weekend so I take the two older boys and my daughter and no they we'd go to a diner and they'd sit across but nobody wanted to sit with that they all sit on the cubicle on the other side my daughter in the middle her two older brothers in either side they' all order eggs with fries the waitress would put the plates in front of them and the minute the waitress put the plate in front of my daughter here's what she would do she would spit all over of fries disgusting right but if you had siblings you know exactly what she was doing cuz you're in the middle You' got two older brothers on either side of your fries on your plate you know exactly where the fries are going they're not going in your mouth she was introducing a poison pill you see why spitting on your fries is a poison pill you spit on your fries you don't care it's your own spit everybody say I'm not touching that it's a very effective strategy some of you might have used in your siblings to keep them from eating your peanut butter sand which your cookie or whatever it is just lick the damn thing in open sight because everybody's got to see you do it the only problem is managers are spitting on on fries but they didn't pay for the fries shareholders paid for them so when you think poison pill think spitting on your fries you pretty much got the idea of what companies are doing now if you look at green maale golden parachutes and poison P pills you don't need shareholder approval you basically can get it with a board of directors signing off and we saw how ineffective boards are the last two need Sher approval which rais the question why would shareholders approve something like this one is called Shark repel these are anti- takeover Clauses that you put into your corporate charter take a simple one typically what percentage of the shares in a company would you have to take over to get control of a company what's a typical threshold 51% right in the early 990s NCR was targeted by AT&T they went in and change the Clause from 51% to 67% you say can they do it you it's a corporate charter what does that do it makes it more difficult for the company to be acquired again I can sell you a song and dance story about how it's good for your shareholder say look I'll use it to negotiate a higher price for you as a company and usually shareholders fall for it but shark repellant require shareholder approval and effectively they put managerial interest over stockholder interest by giving them more power but the final example to me is the most egregious example of where managerial interest went out I don't know how many of you plan to go into m& but I firmly believe that more value is destroyed by m&a than any other corporate action taken out there sounds like an over the top but if you think about what happens in an acquisition you're going to very quickly see what a bad acquisition can do to a company so I'm going to use an example from way back in time but basically if you look at the evidence and Acquisitions there's only one group actually let me take it two groups that benefit from Acquisitions one is guaranteed to benefit which is the bankers right the deal makers right they make money no matter how bad the deal is because it's based in the deal phe the other is Target company shareholders for a simple reason to do an acquisition position what do you have to do pay 15 20 25 no target company shareholders have ever complained about how terrible m& is so if you look at just the target side of the acquisition it always looks good right but to see if an if an acquisition is creating or destroying value try this out the next time you see new story I want you to also look at the acquiring company's share price and then look at the collective value added or destroyed by adding the two on the day Microsoft targeted activ Activision Activision's Equity value and of course it was two years ago because it then got the legal challenges went up by 20 billion you're saying this is great but Microsoft's Equity value went down by 25 billion collectively investors looked at and say this deal is going to destroy value of course if you ask managers their response is shareholders don't see what we can see we have the information we know more the bankers have run the numbers and this is a good deal let's let me start with a simple question do managers know more than shareholders yes absolutely I can see that they can see the inside of the company but managers have a problem that shareholders don't which is they're biased if you're the acquirer in especially in a friendly merger of course you going to say in fact if you listen to to the acquiring Company CEO about whether a deal is good what percentage and if you test it out what percentage of acquisition should be good deals in terms of creating value for the acquiring company 100% and here's where the evidence starts to get really negative McKenzie I think has done these studies in those over intervals of time where they look back at Acquisitions to see what percentage actually create value if you wait five or 10 years increase earnings increase growth all that great stuff consistently they get results of 30 to 35% increased value 65% don't KPMG did a study with almost 10,000 Acquisitions and they concluded that in 84% of all acquisitions there is no Synergy created or negative Synergy you saying what's negative Synergy two companies come together and actually become less valuable than they could have been as independent companies so I'm going to take you back in time to a very old acquisition because it kind of brings on all the things that can happen when you do an acquisition you don't think think through it in 1987 Eastman codak was a well-regarded company in fact it was part of the nifty50 from the early 7s great growth companies run by great managers traded at a premium but by the 80s its business was slowing down and and Eastman Kodak like many companies made the mistake when your growth is slowing down what do you do you call in a consultant and they called in I don't know must have been BCG with one of their matrices you've seen these cash cows dogs pigs and all roaming all over it's like a barnyard of companies and they said you got a nice cash cow with your camera remember in ' 87 Eastman Cod exra let camera and fill you need a star star is a high growth business in the late 80s the star businesses were pharmaceutical companies it's a taking off of the pharmaceutical boom they said go buy a pharmaceutical company there'll be Synergy now I'm not quite sure how a camera company camera film company gets Synergy by buying a drug but maybe they can deliver the drugs through the camera lens I don't know so they go out and bid for this company called Sterling Drugs stock was Sterling Drugs stock price was trading at $40 when the bidding starts they were bidding against a Swiss pharmaceutical company called Hoffman L Ro at $72 Hoffman dropped out but Eastman Kodak did not seem to notice it's like being on eBay you're bidding against somebody the person drops out you keep bidding against your yourself eventually you're going to win and in this case they did and they paid about $90 per sh the acquisition Wall Street Journal headline the next day Eastman Kodak wins bidding war but here's what happened on the day they W won the bidding war their market cap as a company dropped by $2.2 billion in one day now this might be pure coincidence but if you looked at the premium they paid on Sterling Drugs above the $40 stock price it was roughly 2.1 billion you know what a zero sum game is basically there's zero at play you overpay guess where that money has to come out of it has to come out of your shareholders Pockets you're saying what about the extra 100 million and the bankers still have to get paid this was a horrifically bad deal and at the time of the deal Ean Kodak said trust us we know what we're doing so let's say you trusted them you had no choice rightman shareholders you basically went along with the deal the board agreed to it this is what the numbers look like for Sterling Drugs in the five years after the deal and these were five years where pharmaceutical companies were booming in terms of growth I dare you to find any Synergy showing up in the numbers there it looks like they're basically stuck and neutral the deal wasn't working out 80% of deals this is the problem you track those deals long enough you can't find the growth you can't find the earnings you can't find the synergy that was talked about at the time of the deal now to complete the picture eventually rumors started Flo around that Eastman Kodak was thinking of selling off Sterling Drugs I mean again they brought in probably another consultant who say you got to devest yourself as a bad performing business maybe the same consultant who told them to buy their business there's no shame involved in this process so when the rumors first started Eastman code Act dened it no no no we're not selling it in fact the chairman of Sterling Winthrop the division of Eastman Kodak that was the drug business said know massive speculation Which flies in the face of the stated intent Cod act that it's committed to the health business remember the old saying never believe anything until it's officially denied turned out these guys were lying in fact you know few months later they sell off you know they sell off Sterling Drugs for about 1.7 billion I know whether you remember what they paid they paid a total of 5.1 billion let me ask you a question if you pay 5.1 billion in 88 and get back 1.7 billion in 1992 what kind of internal rate of return do you think you you don't even need to calculate this is a horrifically bad deal but here's the damage that went beyond the deal remember the reputation Eastman code act in 87 well-run company Pro I I know this might be overreaching but I think Eastman Cod acts for From Grace can be traced back to that one day and that one deal because nobody ever trusted them again you can take a look at what's left of Eastman Kodak now it's a carcass of a company there's a name but the only reason people want the name is maybe they can use it on something else you can take a great company and devastate The credibility of the company with one big deal yes how much do you think very seldom is it miscalculation and I'll tell you what it's not even know incentives that are explicit if you've ever been in a company when people start talking about a deal and usually the people talking about the deal are not the people in the middle management or the the people at the top the deal takes on a life of its own right it becomes very difficult to stop it because how do you define winning you what to the winner curs in auctions you know how you win an auction you pay more than every what than what everybody else in the room thinks you should be paying that's the way you win an auction the deal takes on a life winning the deal becomes getting the deal done when in fact a winning deal should be getting a good deal done but the good gets dropped out the deal gets done and and let's face you got an ecosystem egging you on right we can talk about the incentives of the bankers involved but again it's really I think management ego effectively driving the deal because losing the deal is viewed as you know lost this battle and if you get locked in a bidding first rule in a bidding war is drop out but people never take that to hard because they want to win I think it's defining what winning a deal is and let's face the popular press goes along right Wall Street Journal headline Eastman Kodak wins bidding war nobody stops and ask ask the question is this worth what you paid for it so I think sometimes you just Mis can miscalculate but often you look at the overriding factors it's got very little to do with getting the numbers right it's got everything to do with other incentives coming into Play It's other people's money let's face it right you're the CEO of an acquiring company you're playing with other people's money so what I'd like you to do is take your company and I'd like you to think about where the power lies in the company I mean remember the old saying power abor of vacuum somebody's got the power right if you're shareholders and you don't have the power the question you got to ask is who has the power because sometimes at least in corporate finance you can talk about outside shareholders effectively running the company which is the utopian word but there are some companies where inside shareholders run the company your Tesla shareholders I'm a Tesla shareholder since last week I have no Illusions about running the company I know who runs the company and I know zero influence in what he does it's Elon Musk company I'm along for the right okay so in some companies it's inside shareholders either because they own a Big Slice of the company does anybody know what percentage of Tesla Elon Musk owns you want a guess it's 133% so basically it's not 51% it's not 49% it's 133% Larry Ellison owns 25% of Oracle Mark sagberg owns 14% of Facebook but he's cooked the books he has 57% of the Voting Rights we'll come back and talk about why this is another way in which corporate governance gets queued is we create comp classes shares of stock which have different voting rights so in some companies it's inside shareholders who run the company as Outsiders you have no power in some companies lenders may run the company you why because you broke a covenant the bank stepped in and it's never left it hire put directors on the board you now have veto power I want you to think through what happens when companies are run by lenders some companies managers effectively are the power center because nobody has an in incentive to challenge them there are companies where the government can be the power and I'll show you an example to show you how this plays out it might either be because the government owns a big Chuck of the company or a g because it's fix the game to be able to control the company without owning that J and finally there are a few companies where employees have enough shares in the company in some parts of Europe actually employees have directors on the board and own enough shares they could run the company so keep the door open because what you're trying to ask is which of these groups has the power in my company so let's take a look at one of the instruments you can use to get that this is a page that lists the top 17 shareholders in a company I think right now you know I I'll send you the this comes off of Bloomberg terminal you can also get it from Yahoo finance it's public information and you can get it for pretty much any company around the world some companies it's more reliable than others so these are the top 17 shareholders in the company here's what I want you to do as I show you each of these P pages I want you to put yourself in the shoes of a shareholder in this company looking at this company at the point in time that I had this page and asking yourself how much power would I as share as a shareholder have in this company this is Disney Circa 2003 take a look at the top 17 shareholders is saying I don't even recognize any of these names even if you don't recognize the names go to the third column it say and look at the source it's saying what is that the way Bloomberg puts these pages together and this is how the public information gets created was when institutional investors file a document called the 13f which lists out the shares that they own in the company when you see 13f there you already know that that investor is an Institutional Investor and if I'm a shareholder Disney in 2003 when I see this list my stomach drops CU I know nobody on this list we'll talk about Roy Disney later the one name on the list that remaining 16 institutions are not going to fight the fight for me why because most institutional investors when push comes to shove are going to sell and move on they're going to vote with their fee you'd be surprised at how many large publicly traded companies you look at that list for yourself look at look at Kelloggs you look at General Mills you can you the older the company the more likely it is that you're going to see this where you have small shareholders or small institutional investors basically dominating the list there are a couple of institutional names and I'll give you the suggestions on what you should be looking for where your spirits might pick up but this is a managerial company a company basically driven by managers here's my second company told you about V the Brazilian iono Mining Company little bit of History here V used to be an entirely government owned company two or three decades ago it got privatized it's now a publicly traded company but the government lurks in the background why because it is two class of shares and V was not unique in fact until a few years ago in Brazil every Brazilian company two class of shares I'll tell you what they were named and then I'm going to ask you which class you will end end up buying if you called your broker and say I want those shares the first group are called common shares and the second are called preferred shares he said I'll take the preferred that looks better you know why the preferred Shares are called preferred because you get no voting rights now wrap your head around that or willan naming of the shares you get a dividend a little bit earlier than everybody else common shares and preferred shares so when you look at the trading in val it's happening almost entirely in the preferred chair the non voting shares but the company is run by the people who own the common shares one of the largest investors in those common shares is a fund called bnes which is the Brazilian national so basically it's run from the Ministry of Finance in Brazilia but here's where the game is even more skewed the Brazilian government retains what's called a golden share what's a golden share gives them veto rights over big decisions so if V decid to do an acquisition the Brazilian government can say yes or no and it its decision is final the board of directors at Val are entirely picked by the common shareholders and I'll wager every name on that list has to be checked off but whoever the minister of finances in Brazilia so if you're the CEO of Val there's only one person you got to keep happy right doesn't matter if your share price is down 30% it doesn't matter what the world thinks about you that person is the Minister of Finance which means your decisions are going to be skewed towards what does he or she want me to do I'll send you a link to a post I did about 10 years ago now on Petr brass very similar structure Brazil's largest o oil company and this was right after they taken a $200 billion company and made it a $0 billion company and I took every aspect of corporate finance and my conclusion was if you are creating a perverse example for corporate finance were ACC compan at the exact opposite of every principle you know what that means right invest in projects only if they earn a return lower than the hurdle rate not higher choose a financing mix that completely screws up your cost of capital and pay out dividends even if you can't afford them Petra brass did it in first directions why would they do it because at that time the Ministry of Finance had sent out a mission statement saying make Petr brass the largest oil company in the world not in terms of market cap but in terms of barrels of oil produced and you as a CEO took it to heart you did exactly what the Ministry of Finance wanted you tell me who you answered to I can very quickly tell why you're acting the way you do so case of Val as a shareholder you're preferred shareholder you might as well just throw into the towel now you'll have zero role in how the companies run because you have zero voting power you saying those terrible Brazilians in 2004 you could a point to Brazil say that's terrible because in 2004 the US had developed a system or almost there were no no I think other than Ford which was grandfather in companies did not have two class of shares because you know it was viewed as unfair and the stock exchanges enforced it the New York Stock Exchange in particular said you can't be listed in the New York Stock Exchange if you don't have two classes of sh shares and because everybody in the last century aspired to be in the New York Stock Exchange eventually they all followed the rots then Along Came Google and Google when it went public in 2004 explicitly created two classes of shares Class A shares had 10 times of voting rights of Class B and I remember thinking institutional investors are not going to go along with this this is so unfair they'll probably fight back you know what institutional invested did they basically lay down and said oh that's fine and the NASDAQ because it wanted to attract companies from the New York Stock Exchange actually said you don't need to you can have different class of voting rights that door that Google opened every big tech company you know there a couple of exceptions walked through post 2004 I've got to give Tesla credit at least in hindsight musk is probably saying I wish I created two class of shares but Tesla has only one one class of shares but you look at almost every other big tech company two class of shares including Facebook if you have a company with two class of shares you're already doomed in terms of your rights as a shareholder so I remember talking to somebody after the Facebook you know IPO so why do you guys keep lying down and taking this accepting shares with low ating RS and this was from somebody a portfolio manager who bought a very big chunk of for Facebook he said but Mark Saka is a good manager doesn't matter we have say he's he's a great manager and I had to talk about you know I had to tell him about malignant and benign dictators you know many dictators start of as benign dictators there are almost none that end up as benign because as they stay on they acquire more power now and the promis Facebook in 2012 looked benign but those same portfolio managers were complaining to me in 2018 about how Mark Zuckerberg was not listening to them this is after the Cambridge analytical Scandal they said you know what and they said you know buying shares in Facebook and complaining that Mark cleberg is not listening to you it's like getting married to a Kardashian and then complaining that a camera is following you all over the place what did you think you would get you buy shares in companies with two classes of boarding rights you are going to not be listen to because you don't have any power yeah that's the story the CEOs the founders tell you right we're longterm you're short term and you got to give us more power that's what dictator said too right these elections you have every five years that's a kind of I have 30y year plans for the country these fiveyear elections get in the way and the next thing you know it's dict data for life so I think that you can sell us in whatever you want but the basic idea of owning shares in a company is you a part owner of the company and then you're telling me you're part owner but you don't have any say because I don't like what you say It just strikes me as unfair doesn't mean I own Facebook shares but I own them with open so again it doesn't mean I won't buy the shares it also means that change is out of the question I will not buy Facebook expecting change I will buy Facebook expecting what I get right St a Motors so I took a look at the top seven 18 stakeholders and I noticed something very interesting I noticed a lot of t companies on the list this is something you're going to notice with family group companies a lot of cross Holdings and it's not a conspiracy it reflects a history for those who you don't have any sense of the Tata group they've been around 150 years and for the bulk of their existence they were entirely a privately own group every company isiv fully own so 1975 if T Steel wanted to build a new plant and Motors had a good deal you know what the family did they owned 100% of both companies they would take the earnings out of T Motors put it in tataa steel and have an accounting transaction that gave TARTA Motors a piece of tataa Steel you see where this is going the older company the more cross Holdings you're going to get but it creates a corporate governance nightmare for shareholders because when you buy shares in a Tata company you buy shares in that company what do you expect the manager of the company to do to do what's best for you but if you look at that shareholding they clearly have bigger interest interest for the group now when I first wrote this in 2013 this this edition of the book of T Motors in 2013 and I presented this to a group of Indian investors they said but this is the Tata group they're a enlightened group they're not the kind of family that would take advantage of this shades of Mark cleberg right benign dictatorships for those of you track the T of the the the corporate government T you see that even in a group where you think that the family is benign these things blow up fact in I think 2017 2018 the Cyrus mystery who was the nonam I wouldn't even say non-f family group he's a another family that owned a large chunk he was brought up through the Tata family to run the company eventually got pushed out because he raised a fundamental question he said whose interests should be served when the the CEO of a tataa company should it be the interest of your shareholders or should it be in the interest of the group got pushed out effectively I'm saying no matter how Noble you think a family is giving them this power is essentially exposing you right and to show you how much a family can take advantage of you if you look at the tataa family they own about 100 companies and about 80% of those company they about you know 80% of those companies they own 100% of the company they're privately own they're of course public companies do you see how if I were an unscrupulous family I can take advantage of you give me some ways let's think perversely you're a control of a family group you want to enrich yourself with the expensive shareholders tell me some of the ways in which you might be able to do it without breaking the law breaking the law you can do whatever you want but without breaking the law you heard of in company transactions where one company sells another company who said surprices the companies do right so let's say I have a transaction where tart Motors is buying something from one of the 100% T owned companies I could set the price a little higher not obscenely higher it's high enough that I can get away with it I'm effectively transferring wealth from T mtis to a privately owned company so if you have pick a family group company check out I mean think about the worst case scenarios they might not unfold but at least be aware of them which brings me to B yeah when you say everything is arms length what is arms length whose arm is in there and who's measuring the length I mean I'm always I mean because this is a legal thing arms length transaction but let's face it there's a trans there's a contract being drawn up there's no arms being measured length so the arms length is a purely legal contrivance that's why I said you probably can't you can't take something that you'd pay $10 for and put at 100 but if you put it at 12 or 13 or 14 I'm I probably can't push back because you could that that product is better that's why we bought it so yeah oh there's a lot of room in business transactions well it might be okay most of the time see this is a problem when times are good they probably don't feel the urge but when you get stretched that's when you're going to see these systems start and that's always the test of a system not how well it does in the good times but how it does in the bad times right fundamentally eventually it's not a question of WEA it's a question of when it's going to break so don't give them the power to do it because eventually you're asking for trouble which brings me to Buu and whoever divis this abomination of a system should really be held to account now it's not just BYU it's Alibaba it's 10 cent when you buy shares in a company what do do you think you're getting you're getting a part ownership the company right so Buu is a search engine in China big growth you're saying this is a good business they make money in advertising you buy shares and buo I have some bad news the buo that was listed on the NASDAQ and Buu and Alibaba were listed in the NASDAQ for whatever reason is not the Bao that has a search engine in China say what's this Buu it's actually a company a shell company in the Cayman Islands that you bought shares in that has an operating agreement with the Chinese operating company that is technically illegal and those are not my words take a look at the Alibaba prospectus because Alibaba is devised the same way and in the prospectus it says the Chinese government can deem this entire arrangement to be illegal and if that happens you know what he end up Hing this shingle in Cay and is actually looked up the address for Buu it's a PO Box it's not even an office it's a PO Box so maybe you can go empty out that PO Box there'll probably be nothing there you bought shares in a shell company but it gets worse who runs bu it basically turns out that you have no power it's basically the owner the founder CEO the company who comes up with a list of people around the company this is not a traditional company you've invested in but again what does the excuse people gave for buy buying buo and Alibaba it's a high growth economy I'm getting a billion people in as my customer base it's amazing how people are willing to kind of Overlook the fact that they have no power by the fact it's a big Market out there and I'm going to close off with Disney and start with Disney 2003 remember 16 of the top 17 shareholders at Disney were institutional investors 2009 I took a look at the top 7 and there's been a change a big change who's on top of the list guy called Steve Jobs you know how he became the largest shareholder in Disney is when he sold Pixar to Disney Disney paid with shares the minute he sold Pixar to Disney Steve Jobs became the largest shareholder in Disney remember you're not Steve Jobs but you're a shareer of the company 2003 you looked at that L I have no power nobody's going to push back do you feel a little better now I did and here's why why I mean people you know I think misunderstand what corporate governance is you want somebody in the board of directors who will push back against matches ask them questions somebody's not a go along and get along kind of person and I don't think anybody ever described Steve Jobs a go along get along kind I mean I I I've never been in a meeting where Steve Jobs isn't there but I would guess that a meeting where Steve Jobs is on the board of Disney and he was on the board of Disney where the CEO gets up and comes up with this cockamamy idea of something to do that he's just not going to sit back and say that's I can't ask a question I'm intimidated to authority figure you know he's probably said that's the stupidest idea I've ever heard this is good because that's what you want in the board of directors is somebody pushing back sometimes changes can happen and you look at it and say you know what that's good for me I am piggybacking on Steve Jobs asking the question that's all we can do when Bill Amman buy shares in the company he's not thinking about you and I when he goes in there he's thinking selfishly but we're going along for the right saying I don't have the power to ask questions but that person does so take a look at your HDs page and I'll give you a way you can look it up in yahu finance and I'll tell you where the Bloomberg terminals are if you've never used them because there are a few pages you don't need much from Bloomberg where it's nice to get the Bloomberg Pages now so that's the first linkage so let's summarize stockholders have little power over managers what do managers do they put their interest over stockholder interest let's talk about lenders in theory what happens you lend money to a firm you don't protect yourself because this firm is a reputable firm and you think nothing bad will happen to you I can safely predict this is just like corporate governance it's not a question of weather it's a question of when you're going to get ripped off you think doesn't it matter what the company is let's look at why there's a potential drift between lenders and shareholders so you guys are going to play the role of a bank we're going to be Equity investors we're going to come try to borrow money from you okay so when we try to come and borrow money from you and we describe the projects we're going to take with the money do we describe them as safe projects or risky projects is it the safest project ever we promise you we will take care of the money as if it's our own so let's say you're a trusting Banker which is an oxymoron and you lend us the money now we have the money our incentives are completely different right because there are no strings attached and here are three things you can do and I want to think again in terms of perverse outcomes because they can play out Nothing Stops me from paying myself a dividend from the money I borrowed companies have done it second if I take projects I told you I was going to take safe project but didn't put it down on paper there's no legal restraint I'm going to take all the money and put in number 34 in the next race that I go to at the tracks if it pays off I get a huge upside if it doesn't limited liability there's not much you can do to me and third if you don't stop me I'm going to keep borrowing more and more money on top of the same asset that you thought you were lending on we're going to come back and talk about these because these are classic conflicts of interest and this is why you don't have trusting Bankers so as a banker what do you do you write in Covenant you can't do this you can't do this you can't do this this but if you didn't write the coven this is exactly how it will play out so let's look at what happens when you lend money to what you think is a reputable company you don't protect yourself so let's say it's the 1980s you're in your mid-60s you've retired and you moved to Florida you live on a golf course you got a half a million dollars in savings you've accumulated this is supposed to be your savings for the rest of your life I'm a broker you come to me and you say look I have a half a million dollars is my pension fund money I'd like to invest it somewhere I suggest investing in an index fund stocks and you said too risky for me this is my pension money I suggest treasury bonds and you look at the rate that looks too low I need the money to pay my golf Dees so I suggest a corporate bond initially you're reluctant because you know companies can get into trouble and they said no no don't worry it's a company you heard of it's called rgr nisco 1980s this was a name you saw in every grocery store right all those products it had been around 70 years and then to sooe your fears I tell you look it's been rated you have no idea what I'm talking about I said it's been rated by S&P and Moody you still have no idea what I'm talking about so it's been given a double a rating you still have absolutely no idea what I'm talking about and then I tell you no doublea rated company has ever defaulted while it was rated daa I'm a very careful broker that is technically true that no double company has been Ra was so you put your half a million dollars into Nabisco bonds and you go back to playing golf couple of years later you wake up to new story read The Wall Street Journal says KKR buys RJR in lbo you saying what are all these acronyms floating around here KKR done a leverage buyout of nisco remember you own Bonds in nisco what happens in a leverage buyout you borrow a ton of money in this case they quadruple the debt that Nabisco had and buy out the equity in the company and make it a private company so I call you up I'm you know I'm as a broker you call me and say what the heck happened here he said nothing don't worry you still have the bonds you still have promised the same coupon but remember that AA that I told you the rating was you're still in the alphabet but you've sled you're now BB rated what does that mean effectively the chance that you will not be paid went up how does it manifest on the day of the lbo when Equity invest was celebrating arj Nabisco bonds lost 20% of the value 20% of value half a million is now 400,000 because you trusted Nabisco to do the right thing we talk about the changes that happened in the bond market after after the arjis because in the mid 80s if you bought a corporate bond the Assumption was companies have this reputation effect they will not do something like this I'm going to introduce a word into the corporate finance language it's called nebis code which is the word you should use anytime you lend to a reputable person or company on the assumption that reputation is going you're asking to be nisco and don't put yourself in that place so second linkage starts to break down the assumption that lenders lend money they don't get protected they get ripped off which brings me a third linkage what did we assume that if your manag is in a firm you go out and you tell the world what's happening to you honestly and on time so that 23 and me CEO probably ran out the minute they found out you you in the 23 and me that DNA information got leaked and everybody could see you know who your ancestors were I don't know why that's an issue but for some people obviously it was something like that happens you go ahead and tell the world it's happening here and markets are rational and cool in truth neither of those assumptions holds up let's start with the first one first managers control or try to control not always succeed try to control how information hits markets we'll talk about how that plays out in practice and and I think that's really an issue that they try to time there are some companies that step over the line that commit outright fraud you've seen the examples play out I'll give you one of my favorite examples a company called Brix a Canadian gold mining company one of the highest stouted gold mining stocks in the 1990s based on what they claimed was the biggest discovery of gold somewhere in Indonesia now if you're a gold mining analyst in New York you've never actually seen a gold mine let's face it right you've seen gold you think it comes in bars and coins so you know how they convince analyst that this was the biggest F you know gold Discovery they flew the analyst out Indonesia they salted the sand with Gold Dust I'm not kidding and they told the analyst look there's so much gold under to the ground it's coming out and if you never seen a mine he said that sounds good they go back buy recommendation buy until one day I think in 95 or 96 new story comes out that the head geologist who work at the company had jumped out of an aircraft at 33,000 ft without a parachute with nothing good happens to you and then people started asking why would he do that and the months after the company starts releasing them we told you there were 100,000 ounces early 10,000 take out the law zero then it's a th and soon they said there's no goat the whole company had been premised on a fraud sometimes that does happen oh here's one of my favorite examples a company called Mercury Finance it used to lend to people with bad credit histories in the late '90s Wall Street Journal Story shows up Mercury Finance cannot find their CFO we've looked everywhere under his desk in his house he's not there and last paragraph says half our cash balance is missing somebody's having a lot of fun somewhere but it's not you Israeli company called Converse one one step further we can't find a CEO took them six months he was in a beach in Sri Lanka this is never good for a company but clearly something fraudulent is going on but most of the time when you look at what companies do it's because they're human at least the manag is are human how many of you are married right let's say something bad happens during the course of the day I'm not predicting anything so I'm not contaminating your day at the end of the day at least for me I'm not going to go back home and say h i have something bad to tell you if you have something bad to reveal you do one of two things one is you try to bundle it with something good right like wrap the car around a tree but I switch to Geo completely disproportional or I try to find a good time to reveal the bad news usually it's when your spouse is sleeping you whisper the bad news and then she or he or she says you know you never told no I told you I definitely did Mar companies do the same thing right one is they tried to bundle bad news with good news remember in 2009 every bank that released earnings said we lost two billion but we're not Leeming we're not bankrupt yet that was the good news right in case you're wondering the others they try to reveal the bad news when you have the equivalent of the market sleeping I'll give you an example until about 20 years ago I used to do academic research until I discovered nobody reads academic research and I decided this was a waste of my time but this was early in my life when I still thought academic research was read and acted on so to show you the kind of outlandishly St stupid questions you end up asking as an academic researcher here's what I did I looked at earnings and dividends announcements by day of the week Monday Tuesday Wednesday Thursday Friday and they look to see what news they contain in terms of how the market reacted to that Monday through Thursday it look pretty much the same relatively good news on earnings relative good news on dividend stock price up and then you get to Fridays terrible things happen to companies on Fridays and wasn't all day Friday it was seemed to happen at a particular point in time if you don't believe me watch the news wires at 401 402 403 44 on Friday horrifically bad things happen to companies either that or managers decide that they're going to release the news after close of trading on Friday hoping what'll happen that that whale trade that cost you 7 billion if you're JP Morgan that was released at 405 on a Friday that You' forget about it by Monday morning Fat Chance of that happening which makes Monday is the worst day of the week to invest it for the last century if you look across weekdays Monday maybe this is because people release bad news after close of trading on Friday so managers are not that good about getting news out because they try to manage the flow and markets are not Angelic either that argument of rational cool markets know I I think in finance we've made a mistake of overplaying that in economics in general rational investors and whenever I run into somebody who's caught up in the rational investor argument I apply what I call the Elvis Presley test the let me try the first part of the test on you how many of you think Elvis is still alive he'd be like 97 years old I think no no that good you passed the first part so you can relax the second part of the test actually comes out you know how You' you most of you have read USA Today right I call my McDonald's version of a newspaper it's like fast fast news you can read the whole paper in five minutes if you want and I don't know whether this is still true but USA Today used to run a poll every day remember this is a paper that gets published every weekday so it's know 250 days of the year they're on a poll how many questions can you come up so they' come up with questions like do you like lettuce on your burger 72% of Americans said yes 21% said no and 7% said I don't know have you ever wondered about this any poll there's a rolling 7% that seem to say I don't know Americans were asked do you know your name 93% said yes 7% said I don't know incredibly paranoid group saying don't ask me any questions I can't answer them so this is on the 15th anniversary of Elvis's death this 1992 or 93 USA Today runs a poll do you think Elvis Presley is still alive 72% said no thank God for small blessings 21% said yes 15 years after his death I mean if you extrapolate that to the population of the US that's 66 million people walking around thinking Elvis is still alive and what do we assume happens when companies reveal news that people take the news look at the effect on earnings and cash flows of the next 10 years discounted back at the 66 million people walking around thinking Elvis is still alive you think this is happening in the background I let's put it this way there are a lot of people out there who are not just irrational but crazy we just have to hope the craziness averages out but sometimes it doesn't I've not done a cross check of this but maybe you took a list of everybody owns Bitcoin and everybody who believes Elvis is still alive maybe you'll get a big inter leaving of the two groups the point I'm making is when we talk about doing the right thing in finance and I tell Bankers this because they go to companies if you do this your stock price will go up 7% say never say that you say the value will go up 7% maybe the price will go up 177% if you're lucky maybe it'll go down 5% the market price is going to be affected by things that are out of your control in fact if you look at the critiques of market efficiency one is that investors irrational and that's absolutely true efficient market people assume irrationality averages out but we know this crowd Behavior but more specifically if you look at the exam people examining market efficiency there is evidence that markets overreact to news there's also evidence that they sometimes underreact to news right there's also of course in some markets a notion that inside of set prices not just in Emerging Markets but there are people in the US go on social media all those mem stock people believe absolutely that Insider set prices that hedge funds and investment banks are in cahoots to set the prices is an Insider conspiracy and third and this is I think what I want to talk about is markets are shortterm and that's a short-term argument and manages a longterm so I want to get your priors because I think that is a legitimate place to go so the question I'm going to ask you is what do you think do you think markets if you look at you know you know focusing on market prices will it lead to so for the moment don't you know don't double think and say what does you know what do I think about what do you think will focusing on market prices lead companies towards short-term decisions agree or disagree no show of hands needed second if managers make decisions without having to worry about the effective stock prices will they make better long-term decisions that's a sales P for managers right or third you can say well neither of these groups is particularly longterm the question is who's more long-term so basically the question I'm asking is do you trust managers at the expense of markets or do you mistrust them both I'll tell you my priories I don't trust either group I don't think managers are particularly long-term I think markets are but I'm going to argue that the short-term basis for Mark of the argument that markets are short term is is built on some pretty thin growth in fact there is significant evidence that markets are far too longterm sounds like a weird thing to say but let me back that up if you look at the companies the highest market prices out there you know there often companies especially in the last decade money losing companies no business model and markets are attaching a 202 billion value I know the investors hope to make money short term but they were attaching in fact the evidence is that companies with current earnings stable low growth companies are underpriced not overpriced okay and when markets announce something that adds to Future growth markets are pretty you know or companies announce something that's that's supposed to add to Future growth markets give them a lot of leeway depends on the company of course in fact Rd announcements if you look at R&D announcements and you know different kinds of announcements companies make that cost manages investors current earnings but offer the future growth for the most part Market reaction is positive when Mar when companies call come out and say I'm going to invest x billion dollars to get you growth in the future the only grouping that doesn't seem to have much of a payoff is product strategies but those are the emptiest of all announcements there's no money there you're saying my strategy will be different I'm planning to do something different he say what about Facebook and the metaverse you remember the story of Facebook what did Facebook say they were going to invest a hundred billion dollar in the metaverse if you're a Facebook shareholder what's your next question going to be what the heck is the metaverse and how are you going to make money on it I my vision of the metaverse I can see it's virtual reality I think Sim City 30 years ago I mean I'm I'm you know basically you can live in a virtual world you can build a virtual house you can get a virtual spouse you can have virtual kids you can send them off to Virtual College this sounds incredibly attractive to some people and not you know so I can understand it but how exactly do you plan to make money that was a question Facebook did not ask answer and I think markets correctly punish them saying you want to invest a100 billion of my money but you can't tell me whether you're making money and advertising from transactions from being the ecosystem in which you know you charge other people for being there it was a singular lack of discipline the pace of and to give Facebook credit they've learned if you look at the last few earnings report and part of the reason the stock price is up is Mark Zuckerberg said you're right I'm not going to throw a100 billion dollar down a hole and not tell you what's in the hole so not all long-term announcements get rewarded but for the most part markets are much more long-term than we give them credit for so I'm going to stop with that when we start off tomorrow we'll start with on Wednesday we we'll do the last piece of this you know corporate governance puzzle you know and hopefully we'll get done with it I send it to I sent it to a class no you won't get it that