that of okay folks before before I start uh I think we've solved the mystery of the sound that's coming in here uh the school installed new receivers in the classrooms and they're picking up sound from other classrooms don't I don't don't even look at me so but they're going to resolve it so you know we should be okay with we shouldn't be hearing other people's sounds so today I'm going to complete the last pieces of setting up the class there are few more Loose Ends talk a little bit about the quizzes the the the project and then we're going to jump into talking about what the end game from businesses what are we trying to do when we start a business now you might think the answer is obvious but it's become incredibly muddled over the last 20 years as to what exactly you're the CEO of a publicly traded company own of a business what are you trying to do with your business so last session we were talking about the first principles in corporate finance and I said there were common sense right so the investment principle remind me again what the investment principle says I'll get I'll help you along so you need to take projects that earn a return that is greater than your minimum accept hurdle rate so the hurdle rate comes from the riskiness of the investment in the mix of debt and equity and the return should be based Bas on cash flows not earnings if like when you get the cash flows have all side effects built into it the financing principle says find a mix of debt and Equity that's right for you not right for everybody but right for you it minimizes your hurdle rate maximize your value and the right kind of debt for your company is the debt that best matches your assets and the dividend principle says if you cannot find Investments that make your hurle rate give the cash back to the owners it's about as simple as you can think a set of principles can be right but here's the problem there are people out there many of them in cities like New York and London and Frankfurt and I'll let you think about what they share in common who think the rules don't apply to them why because they're special they went to Wharton or Harvard they got an NBA they work at Goldman Sachs or KKR they think they're special because they're too smart for the rules to apply to them so every every 10 or 15 years there's a cycle you go through they decide they're going to break the rules and it's going to be okay so I'm going to take you back about 30 years and tell you a story about what happens when you break the roots it's a company called steady sa I'm sure none of you have heard of this company it used to be an indones Indonesian taxi cab company early 1990s Indonesia is booming steady safe decides it wants to grow what does that mean buy more taxi cabs put them on the ground so you're going to be my investment banker you know enough Corporate Finance already to help me on this one I'm going to come to you asking for advice on what kind of debt I should take on to buy those taxi caps so you ready how long well in terms of maturity how long term should my debt pay you're allowed to ask me questions back so I'm a taxi cab owner I want to borrow money to buy taxi gaps how how long term should the debt be what's the question you're going to ask me well that's part of it how long is the business going to be run but what am I buying with the debt taxi caps the question is how long does a typical taxi cap last say it's 10 years I run them into the ground should be 10 year debt in what currency I'm going to say with you in what currency should the debt be what what do we say about Magic okay so if you're an Indonesian taxi cab company when people get out of your taxi cabs what currency do they pay you in you say what the heck is the Indonesian currency it's Indonesian rupia right they paying rupia we've got it nailed it should be 10y year rupia debt right that was easy so let's play back what actually happened steady safe goes to paragen not the same paragen you see now in Asia but they used to be an investment Bank in Asia called parag you're saying why used to be that's part of the story as well they go to parag green Investment Bank well regarded they ask them exactly this question and parag green tells them to borrow 10 years so they got that half right but in US Dollars why would they do something stupid like that they gave a very compelling reason and you can probably guess what that reason is if you're from a market like India or Indonesia this happens still all the time why do you think they told the company to borrow in rupia I'm say in dollars it's cheaper they said ask you a question now what part of the world are you from okay where in India okay if I asked you what the temperature in China was today give me you know give me a rough guess that's good you're already thinking in US terms in China you'd have given me no the reason is when you are in Europe or much of the world you think in Celsius today I checked the temperature in Chennai it's hot again I mean no surprise there it's like 35° and the temperature of course in New York today is about 38 degrees you're saying Chennai is colder than that you're saying that's absurd one is in Celsius and one is we know we can't compare Fahrenheit to Celsius but companies do this all the time right they compare interest rates in dollars to interest rates in rupe and of course the dollar rate is going to be lower but par you know and to give steady Safe Credit they ask peragine should we be worried about the fact that we're borrowing dollars to fund rupia assets and peragine said don't worry about it the Indonesian government has pegged the exchange rate you know what that means you know basically the the exchange rate is fixed and will not change and has promised us that nothing bad will happen steady safe listens to parag after all you the Investment Bank you've got the expertise they go out and borrow 10year US dollar debt and for a couple of years things go swimmingly well and then in 1996 Indonesia goes into a tail spin a crisis and one day in 1996 Indonesian government decides that it's going to revisit the peg never good news when you revisit the Peg and they devalue the rupia by 70% you ready let's wake up to the morning after it steady safe your assets are all rupia assets right in dollar terms what are they worth now 30% of what they were yesterday if your debt had also been rupia debt it to would have been marked down 70% you wouldn't have been happy about what happened but you're not in any trouble but you see what happened to steady say their assets get marked down by 70% because their assets are rupia assets the debt stay is what it was because it's dollar debt guess what happened to steady save they went bankrupt the good news is they took their investment banker down with them if you ask me it doesn't happen often enough right they're always there at the wedding they're never there at the divorce actually they have divorce lawers and wedding planners rolled into one outfit so they get you in both places but the truth is that this never made sense but because you think you can override first principles you go and override first principles it blows out for you take another example let's suppose I take 300 people who had trouble making their debt payments in the past bad credit history I put them in a room I run models that tell you that these people will never default again and said lend to them as if they're default free do you think that even makes any sense that's exactly what we did leading into 2008 right we took people with bad credit histories we told them and we created these mortgage back Securities and we said you know what they've had bad bad credit histories but we've run models that show they're like AAA rated based on our models lend them money at AAA rates and what do we have we had the 2008 crisis if the definition of insanity is you keep doing the same thing over and over again you can see that this process repeats itself up people think they can break first principles it come back it comes back to bite so one of the things I will come back to in this class is I will come back to reemphasize First principles and if you see practices maybe in the company you worked at or out there that are variance with first principles let's talk about that is there an explanation are we setting ourself up for another crisis somewhere along the road because that's the way it always plays out so those are the broad themes for the class let's let's let's get back to the specifics of what's involved in the class Okay so so if you know rather than give you a traditional syllabus I'm going to list out the sessions of the class in terms of the big picture so we're going to spend the next three sessions talking about the endgame during this period I'm not going to talk about cost of capital not a single number and for some of you this is going to be a relief because you don't like numbers the first three sessions it's going to be feel like a strategy class no numbers at all but I know hold off because there will be numbers coming because I want to talk about what the end game is because if you get the end game wrong everything else is going to get blown up then in the for in the next 10 sessions or so we're going to talk about the investment principle first talking about risk and how it plays out hurdle rates and how to bring the mix in and then in terms of talking about returns why cash flows is opposed to earnings how do we bring the timing of the cash flows and how do we build side effects that's 15 sessions session 16 through probably 19 we talk about the financing principle first by talking about the right mix of debt and equity for a company and then talking about what the right kind of debt for your companies and towards the end of the class sessions 2021 22 23 we'll talk about hey how much cash can a company return and indirectly we're also going to ask the question how much of a cash balance is too much of a cash balance it sounds like a stupid question right how much cash does Apple have right now on its balance sheet roughly $150 billion is that too much cash you say of course it's too much cash it's not that simple I'm going to argue that how much you will allow a company to accumulate as cash it's directly a function of how much you trust that company with your cash there are some comp companies wouldn't trust with a dollar of your cash there are other companies we let hold 100 billion 120 so we talk about what differentiates the two and then in the last session last couple of sessions we're going to circle back to the objective because in the objective I said the objective in all of this is to maximize the value of the business you're saying but what is value how do we estimate it so end of this class is going to be the icing on the cake of bringing all the corporate finance decisions you make back to what the value of a business is so that's a plan and as I said it's an applied corporate finance class and here's what I mean by applied everything we do in this class we're going to apply or I'm going to apply on real companies and I'll give you the six companies that are going to be my lab experiments through the class these are not case studies these are real companies I'm going to run them through I'm going to use 2013 as my point at which I'm running through them but I'll give you what the companies they still around we're talk talk about what they look like in 2023 or 2024 the first company I'm going to use and perhaps the biggest lab experiment I'm going to run through is Disney why did I pick Disney because everybody kind of knows what Disney does I mean I could have picked Alcoa and we would have been wrestling for the next 15 weeks and what exactly does Alcoa do Disney you've been in the theme park you know about Mickey you've seen The Avengers movies so large US Entertainment Company the second company I'm going to use so everything we do in the class I'm going to apply on Disney I'm going to estimate Disney's hurdle rate Disney's returns and you can already see Disney 2013 looks very different from Disney 2024 so we're going to talk about what's changed over the last decade at Disney the second company I'm going to use is a company called Val never heard of Val it's a Brazilian company but it's really a global Mining Company it's a largest iron or Mining Company in the world that through the accident of History happens to be Brazil based what did I pick Val to get as different from Disney as I can get right new economy old economy Service Company manufactur Mining Company develop Market emerging market so I'm going to use vol to talk about what's different when you have an Emerging Market company you don't throw the principles out but you got to adapt them so that's going to be my second company third company I'm going to use is a company called tart Motors it's part of one of India's largest and oldest family groups called the Tata group it's a mass Market automobile company that's morphed into a global automobile company we'll talk about what allowed it to morph but I want to talk about it as a family group company you know that family group companies are more the rule than the exception in much of Asia parts of Latin America you saying so what if it's a family group company I told you T Motors is part of the tataa group at one point in time every tataa company shared the same headquarters building in Mumbai called Mumbai house so two floors would be TARTA Motors tataa steel there are like 113 Tata companies in the group and they all share that building and on the very top floor sat roton Tata the patriarch of the family he ran a company called Tata Suns which was not publicly traded but it's a holding company that controlled all of these companies you see why this is going right we talked about companies making decisions we acted like companies are Standalone independent decision makers do you think there's a chance any chance at all that TARTA Motors can make a big decision without the CFO CEO of T mot taking the elevator up to the top floor and checking with family group companies often what's good for the group can come ahead of what's good for the company and it's it's really unfair because you buy shares and T Motors T Steels DCS and the family group can now make decisions that make you as a shareholder worse off because it makes a group better off it is reality we have to face up to we'll see how it plays out in investing financing and dividend decisions so when I look at T Motors and how it picks debt we have to bring in this player into the room of what does a family group think of your borrowing money the fourth company I'm going to use is a company called Buu what does Buu do does anybody know I'll make a confession I didn't even have any idea what Buu was as a company it's a long time ago and I had to give a session in Shanghai the one and only time I've been there i' land and I'd look for something actually the first thing that happens I have a Blog on Google I'm very oldfashioned as a Google blogger I haven't done any of the up so I land in I was writing a blog post as I got on the plane I land I want to check and my blog has disappeared Google has disappeared I said what the heck happened while I was in the air did a trillion dollar company just go into thin air the truth is without having some kind of system you can't really use Google as your search engine Buu is the Chinese search engine it dominates the Chinese market I wanted to pick BYU first because I wanted to pick a Chinese company in the mix I wanted a Chinese tech company because I wanted a tech company in the mix I got a twofer by this choice so basically everything I do in this class I'm going to apply on bu to see if things are different for tech companies for Chinese companies the fifth company I'm going to use as my lab experiment is do shc why because I like horror stories well truth is it's a bank I wanted to bring a bank in because banks are regulated entities you can't do whatever you want you know in terms of financing or dividend so I to I want and as a bonus of course you got a troubled bank and I'm using the word trouble Loosely here it's well beyond troubled so I'm going to talk about how Banks make investment Finance in dividend decisions and I'm going to top it all off with a business called books it's not a publicly traded company it's a privately owned bookstore in New York City it's a small business the owner is behind the counter he's saying why are you picking a private bookstore because what did we say last session Corporate Finance principles matter to everybody so I want to talk about how the owner of a small business uses Corporate Finance or should be using Cor Corporate Finance to decide where to invest how much to borrow and how much cash he or she can take out of the business so as I do this you're going to be tempted to sit back and watch me experiment but I'm not going to let you and this is where your project comes in each of you first you're going to form a group every person the group has to pick a company and the only thing I would require is there be some loose connection ction across the companies so your group might be travel so give me some suggestions what would go in your travel group as companies you could do Expedia you could do United you could do Airbnb I mean you can already see travel includes you know you know Airlines it includes hotels it includes booking services so travel can include your group can be um you know technology is too big so don't pick a group so it could could be a portion could be software and you could have everything from Microsoft to a small software company that provides entertainment software I would encourage you to get diversity across the group try to get a foreign company and try to get a small company and a big company why because what will make your project interesting are the differences across companies which you can then used to say hey why does one company in my group never borrow money and another company borrows money so as I said the project is in motion your job is the first step is to find a group don't pick a company before you find a group unless you have so much confidence in your persuasive powers that you can convince everybody else to pick your the business and then it's up to you to pick you know I am very loose in in in in the grouping I mean I know there are groups in the past that have picked sin you know like sin as opposed to go and the in group what do you pick gambling tobacco think of yourself as the anti-c group you're going to go out there and pick every company that is in a sense a bad company so I'll let you pick that and as you pick the companies I'm going to send you a master list I would like you to enter the name of the company you've picked don't spend too much time going back and forth because if you pick a company and you want to change it that's perfectly okay I just want to know that you're starting on the process so I'll send that link to the master list and you can enter your know whether you enter found a group and and picked a company and as I said by the end of the week if you haven't found a group I will try to put you on an orphan list get adopted and know you will have a group so know one way or the other I want that process out of the way so in terms of uh what the class will in terms of the grading for the class I'll give you a rough breakdown of the grades and this is determined by the finance group other groups might have their own you know so basically you know there's a there's an outline what we can give so I want to be completely transparent it's about 25 to 35% a about 50 to 55% B's C's will be the bottom 10% which means you can work really hard in this class and end up with the c life isn't fair I wish I could guarantee you a be if you are here and you put in the work but most of the time if you hear any you put in the work you are going to find your way to a b B+ a minus a where wherever you want to go but my job is to find a way to differentiate the a the B's and the C's and it's not based on what you've memorized or whether you know the equations so if you look at the at the coursework for the class the project that I talked about will be 40% of your grade okay there'll be one grade for the entire group so no coming in and negotiating saying I did the work in the group group can you lower the grades for everybody else and raise mine no some I've had people actually with the straight face try to do that don't even try which means part of your job in the group is to get people in the group to do what they need to do because the entire group rides on essentially everybody doing their share there will be three quizzes for the class first quiz is on March 4th the second quiz is in April 1st the third quiz is in April 22nd each of the quizzes will be worth 10% they're open book open notes and every quiz or exam that I've ever given is online so you will be able to see what these quizzes look like so you can't you won't be able to walk in and say I didn't know what the quiz would look like you'll be intimately aware of what the quizzes will look like the final exam right now scheduled for May 13th from 11:15 to 1:15 I've already got a few emails from people saying I have to leave because remember that's towards the second week of the finals week there finals week I think starts on a Wednesday it's the following Monday if you have to leave I will give an early exam for those of you have no choice my strong suggestion is you wait till Monday because you'll be turning in your project on May 6 which is the last day of class it'll give you a week to prepare for the final but if you have to take the final before that weekend and you want to get out of here just let me know and you know we'll figure out know when that early exam will be now I I always explicit about things because that way we don't have any misunderstanding I would like you to take all three quizzes but if you have to miss a quiz for whatever reason you're sick you're traveling you have an interview do it for a good reason right and I've listed out you know some good reasons if you go to my website I've listed out good reasons for quizzes the truth is I'm not going to double check you I'm not going to ask for a doctor's note if you're sick so if you really want to lie and say I'm sick I can't take the quiz what am I going to do force you to show up but if you do miss the quiz here's what's going to happen the 10% on that quiz will be move to the remaining quizzes and and exams so let me be very clear if you miss the so let's say you take the first quiz and you miss the second quiz I'll take the 10% the second quiz move it into the third quiz and the final exam so the third quiz will not be worth 12 and a half% your final exam will we 37 and a half% if you miss the third quiz that 10 it'll always be move forward to prevent what I call Strategic quiz missing which is you do really well in the first two quizzes otherwise you'll be tempted to miss the third quiz so that's not there is no no benefit to missing a quiz even if you're not quite ready which is not a good reason for missing a quiz and you're tempted to make up an excuses show up and take the quiz because the worst that can happen is you get a zero but here's why that's going to be okay if you take all three quizzes your worst quiz I'll take the score of the West quiz and replace it I won't throw it out but I'll replace it with the average scores on the remaining exams so you get a zero on the first quiz 10 on the next two quizzes and 30 on the final exam in other words you're perfect on everything but you got a zero and one I'll take the zero and replace it with the 10 that's the most extreme scenario but effectively one of your quizzes is a freebie my advice is don't use it up on the first quiz if you can avoid it it's nice to have a freebie holding out there so but you know recognize that that's you know that's you know one benefit to taking all three quizzes but that'll apply only if you take all three quizzes if you miss a quiz that benefit is gone so any questions on the administrative stuff for the class so in terms of group work you know pick your own groups and I will try to get you into group and the rest is pretty pretty much so let's talk about the end game for a business now why spend so much time in the end game there's an old saying if you don't know where you're going it doesn't matter how you get there so I want to talk about where we're going before we talk about what's the best way to get them so I'm going to start with a very basic description of why we start businesses why does anybody start a business the pragmatic Way To Think about it is you start a business because you feel there's a need for whatever you're doing out there in the market perceived or real you think there's a need you're going to produce a product or service to meet that need and what do you hope to get in return in addition to the Gratitude of the people that get this product or service you hope they will pay you I know it's incredibly mercenary but you're starting a business not a charity and you hope that what they will pay you will cover the cost plus more so that's the bottom line you start a business but the push back you get is That's So narrow-minded right that's basically you think about the last 20 years that's been the big push back this is far too narrow a vision of business a business should not have an end game of making money it should have other end games so and that's kind of alluring right you're saying I want to start a business I want to do good I want to make the world a better place it's human nature and if you think broadly about the three big push backs you see from people who look at the traditional objective so think of this as the Milton Freedman description business one of Milton freedman's most read articles was the New York Times article he wrote in the early 1970s where he said the business of business is business basically you're trying to so his point was hey if you want to do all the side stuff that's fine but the the end game year is you got to make money and the push back has come from three different places all of whom share a common theme and we we'll talk about what the theme is the first is relatively recent the last 10 years I'd never heard the word sustainability until about 10 years ago now I've got to put your plugs in and put you know cover my eyes as I walk through this school because sustainability is all over the place you're probably taking three classes with the word sustainability in its name right so there is this pushup this is not about the end game should to should be to make your company sustainable we'll kind of leave it hanging there because we've got to convert this to pragmatic decision rules we'll come back and talk about how insane it is to talk about sustainability as your endgame for a company you want to talk about the planet that's a very different game right we all have to live on the planet we want to talk about making the planet sustainable making a company sustainable I'm a little hazy about what that means and I'm going to come and push back the second set the second push back we got was from people who said there are lots of stakeholders in a business are there absolutely there are stockholders there are lenders there are employees there are customers the society and the basis for this push is this is so unfair why are you just picking shareholders why make this this looks like favoritism right to pick one sh one group and put them on to why are you focusing on shareholders we should be maximizing stakeholder wealth again we'll take it on frontally because I'm sure there are classes you get about stakeholder wealth maximization let's play it out and of course in the last 15 years you also have had this push on ESG as hey the endgame for a company should be built around you know creating environmental social and governance objectives rather than Maxim okay so for the moment those are the push backs clearly the debate has been joined and I welcome it because I think we need to get this cleared up otherwise we're going to be completely confused for the rest of the journey so let's start with the question of who the stakeholders in a business are so I've try to list them out and maybe have not a comprehensive list obviously there are shareholders what do shareholders do they provide Equity to a company to get it started you have lenders they're sh they're stakeholders too right they lend money to a company in return for interest in principal payments you have employees company without its employees is a shell they're clearly big stakeholders you have customers what's their stake they buy your products and services a society have a stake absolutely because you create side costs and benefits of society even competition has a stake they have a stake in making you fail but they still have a stake they're all stakeholders and it seems strange again and I can see the base of the stakeholder argument why when you have all these different stakeholders you put shareholders do you give shareholders privacy anybody want to give that a shot yes because shareholders provide the capital based so do lenders right if that's your argument then lenders should be providing and employees are you know they provide human capital so if you open that door you could I could make the argument that all of those groups should be allowed to run it yeah shareholders lose the lenders lose the company loses as well right employees lose you know employees so in a sense losing is an argument that any of these stakeholder groups are yes shareholders the highest risk well lenders can take a lot of risk if it's a low rated company with a lot of default risk yeah all not that's not the right word right they managers report to the sh but that's self self fulfilling right I made chal's Primacy I made the Delaware courts enforce it and so that kind explained it that's what happens when I put shareholders in but my question is why you're getting closer yeah but that again is self-fulfilling I give them control because I gave them privacy I could lenders control of the company I we could make employees run the company yes okay now we're getting closer what kind of claim do lenders have no no but let's talk about lenders what's the claim that lenders have it's a contractual claim right when you lend money to a firm what do you do you enter into contract with a firm and if you ever had a loan agreement they put in Covenant on what you can or cannot do they set an interest rate in a principal payment it's a contractual claim when you go to work for a for a company what do you sign on that first day before you start an employee agreement right it specifies both sides sometimes companies violate it and you can sue them but there's a contractual claim do customers have a contractual claim when you buy a product or service implicitly you have a contract right so if I buy a a product and it doesn't work I can sue the company saying I bought this product expecting this outcome but it's not working I can complain to the Better Business Bureau as a contractual claim does society have a contractual claim you mentioned the word regulations and laws regulations or laws and society's contractual claim and in addition they have a financial contractual claim which is called taxes right every claimh holder in here as a contractual claim except for shareholders who get what whatever is left over let me ask you a question if you get only whatever's left over and I don't let you control decision making how much do you think is going to be left over nothing why would I ever have a residual claim if you don't give me control of the decision making I still have to negotiate those contracts this has nothing to do with putting people up it's a fact that shareholders have a residual claim and if you don't don't give them privacy there will be know shareholders that might be a desired outcome but that's a different fight you want to fight we put shareholders at the top of this pyramid not because they're special but because they have a residual claim now we'll talk about you know whether this can create consequences you might not like but that's the reason so the next time somebody in in some class says why are you making s special be clear about what it is in this process that leads you to give shareholders privacy so in theory the objective of a business in corporate finances to maximize the value of the entire business but the value of the business comes from both debt and Equity so in practice we start to narrow this objective somebody mentioned that managers are accountable to shareholders that's absolutely right and if you're the manager in a company and you're accountable to shareholders rather than maximizing the value of the business you will maximize the value of equity shareholder wealth why because that's who you're answerable to and if you're a publicly traded company you might decide to narrow this even further because shareholder what is this kind of fuzzy concept right who's going to measure it you could call it McKenzie they make a subjective judgment there could be bias but if you're publicly traded what can You observe that then becomes a standin for shareholder wealth you can observe the stock price in practice corporate finance the objective instead of maximizing fair value gets Max becomes maximizing stock price it is not the the the the objective incorpor it's because it's a pragmatic choice we make you can observe it and that is where I'm going to start this discussion because for a long time that became the basis you're a CEO or a company manager your job is to maximize stock price can it potentially create problems absolutely we'll talk about the worst case scenarios and how it plays out but I want to start about you know the talk first about why we need one objective because some of you are saying why do we need to pick one why can't we have five objectives or four objectives if you've done operations research and you I give you an optimization problem every optimization problem has one objective and multiple constraints life is about picking objectives and constraints because if you you know I'll give you the analogy I know I four kids are all grown up now but I remember when we used to go on summer vacation all six of us if I said my objective this vacation is to keep everyone happy you know what the outcome would have been no one would have been happy so when we think about objectives it's basically you've got to decide you might have all these different things swimming in your mind you say what is my primary objective to me this is the weakest link in many organizations if you don't have a primary objective things get really muddled we'll talk about entities that have that nonprofits classic example know I used to work with a homeless organization in New Jersey and I think they made a mistake and put me on the board for a little while and I said what's the mission here they said it's to to to find housing for the homeless to feed the Homeless to work on legislation to make it easier for them to get IDs no no no I said which is the objective and they said why can't we use all of them I said because you have scarce resources and you have to decide what your primary objective to feed the Homeless where I will invest my resource will be very different than if a home the homeless you have to decide what your objective is and what your constraints are and that's basically a choice you have to make so you can't cop out here and say why can't I have five objective you have to decide what the objective is you might disagree with my choice of objective but then you got to give me what your objective will be and if you think about why we pick stock prices as our optimizing tool it's very simple stock prices are updated constantly for instance if you said I want to maximize earnings stock prices are too volatile you can maximize earnings right but then remember earnings get measured at once every 3 months so you don't get that constant updating the way this plays out in markets is companies sometimes announce big news yesterday Elon had a bit of a setback in the Delaware courts do you know what happened the Delaware courts basically went back and said the 2018 compensation agreement that the board signed off on with Elon which was tens of millions of dollars is illegal because the board was not independent we'll come back and talk about boards and how they made that assessment is that news yes is it big news and how will it move the value we could go debate about this but you know the best measure of that was is this morning Tesla opened $2 lower is it news is it bad news yes not hugely catastrophic news theyve think there will be but markets give you instant feedback on your decision making and never underestimate the advantage of having something that's instant feedback and from an academic standpoint from a theor stand but it's nice to have something you can observe because then you can check out right away when I make a decision is it good or bad looking at what the stock price reaction is so we turned CEOs loose and for decades we've done this saying go out and maximize stock price so I want to start with a nightmare scenario what's the worst thing that can happen when you let a manage a top manager be focused just on maximizing stock prices I call this Cutthroat corporatism which is companies where Ma where basically it's not even managers but insiders controlled the company and they're focused on maximizing stock prices and all of the other stakeholders are so weak that the shareholders can in the late 1800s Andrew Carnegie John de Rockefeller built monopolies in the US they use publicly traded companies as a facade but it was really about advancing their interest so what did they do they they they basically got lenders to lend them money at below Market rates because you know they were effectively controlling the financial markets as well as the companies their employees had no bargaining power you you know so they made them work long hours with substandard wages their customers they charge extraordinarily high prices because where can they go their monopolies they were doing maximizing stock prices but because the other stakeholder groups were so weak they were able to exploit those stakeholder groups increase stock prices and make everybody else worse off including Society so the oil wells in the late 1800s you you could create all the pollution you wanted the government was either wasn't aware or couldn't do anything about it think of this as the worst case scenario so when people talk about maximizing stock prices are bad if you're going to P paint an you you want to create a straw man this is what what you want to create like here's what your nightmare should be a CEO for companies maximizing stock prices and absolutely no compunctions about taking everybody else to the cleaners any of you heard of a guy called Al Dunlop do you Beau Al Dunlop was the CEO of Kimberly Clark which is a paper company in 19 the 1980s and early 990s and he got a reputation as being a successful CEO he was great at cutting costs he went in in Kimberly Clark he cut cost he cut you know employee benefits he turned Kimberly Clark around and he acquired the reputation of being a turnaround CEO in fact he became CEO of Sunbeam another company that was in trouble because in a company in trouble what do you do you hire a CEO with the reputation of a turnaround CEO and he came to Sunbeam and guess what he did he cut cost he was a one trick pointy there's no no strategic bones in his body and Sunbeam problems are not cost he drove Sunbeam into the ground and he also committed a lot of accounting fraud along the way because maximizing stock price that's your objective you can do it by doing Shady things he took it to an art form in fact in 1997 I think Fortune magazine or one of the Business magazines a fast company I think wrote this you know did this piece on are is your CEO a psychopath and Al dunler passed every test for and he was open about the about admitting to Psychopathic Tendencies you put a psychopath on top of a company and the system is weak I mean you can maximize stock prices by doing horrifically bad things so if you ask me can bad things happen when you ask companies to maxim of course they can and I can give you anecdotal examples where that's happened create case studies around it and use it as a warning for you don't want this to happen at your company but let's make a more general statement is maximizing stock prices incompatible with your stakeholder groups doing well because the implied message when people say don't maximize stock prices is they seem to be saying if you maximize stock prices you must be ripping off your employees in fact often the news stories that lead people to this conclusion is you'll see a new story that says such and such company laid off to ,000 employees and you keep reading the story in the last paragraph what does it say it stock price jumped $3 and you're making the connection saying laying off employees leads to higher stock prices and with anecdotal evidence again I can back that up but the question is is this true in general so here's what I did I went to GL into glass door glass door is this company where you can report the employees I looked at the most the companies were employees at the highest satisfaction and companies with have the lowest satisfaction then I went into the into my stock price database and I looked at the companies that have done the best over the last 10 years and the companies that have done the worst and you can try this out yourself if you look at the top 10 companies you see a lot of the Fang gam stocks people are happy you look at the the bottom 10 you see a lot of companies in trouble and the reason is very simple to take care of your employees you've got to be doing well remember many employees get stock-based compensation I mean this morning I was reading about the company 23 and me go to the company where you send in your you know your DNA and they tell you you know where you were born they probably make up crap but you they tell you what you want to know you're half you know whatever quarter this No Quarter that so that's a company that went public at a six billion market cap five years ago today the stock price is close to zero I I I can almost guarantee you you don't want to be working at 23 and me right now because your pay was primarily the form of stock it's all gone to dirt and there's nothing you have to show for it most of them probably been laid off for the most part doing well as a company is what allows you to provide your employee benefits and add those extra things that make you happy at a company again there are exceptions we can talk about the exceptions but for the most part doing well and taking care of your employees go together and if you take care of your employees sometimes for mercenary reasons happy employees are more productive I mean you go to a Costco or a Trader Joe's trade those I think those people are on drugs they're all happy all the time right I mean you go to cashier you know smile on his face life is good no but it does make you much better feel much better about shopping there so is there a is there a payoff absolutely if there's a payoff from Trading your employees better and it shows up as higher earnings and value by all means do it but this is something again that we have to get out of the way that doing well as a company and taking care of your employees are somehow know I'd much rather work at Amazon than any brick and motor retail would you want to work at Macy's this a thought of doing it kind of makes me want to not live right it just it it's depressing right the compan is on a pathway to nowhere and it's really got to do with the fact that the company is in bad Financial Health they can't afford to give out benefits add extra things this just barely making it you're saying what about stock prices and customers again you're given the choice do you want to maximize your stock price or do you want to keep your customers happy about 30 years ago I was U I was asked to give a talk at to the Gap stop management this wasn't the Gap was actually a growing retail company adding more stores those days are in the past so I you know I think they had it in Sundance we been in Sundance extraordinary expensive place Robert Redford's ranch which tells you how well the Gap was doing usually you can tell how well a company is doing but where they have their get togethers if they have it in Oakland you kind of hit rock B you have it in Sundance you're doing really well right so you know it would show up and I had the singular Misfortune of following the marketing head hono the marketing Guru so it was somebody I don't know which which school he was teaching at and he got up and he said the objective for The Gap should be to maximize customer satisfaction I got up and I said that's a stupidest thing I've ever heard let's think about your experience at the Gap I don't know when the last time you visited how many of you been in a Gap store right okay so think about your Collective satisfaction from that experience first you walk into the store it's well L feel pretty good right you walk in you find the khakis in your size and the shirts in your size even better you put them in a you know in your in your shopping cart and you get ready to leave and there's this small thing you have to do that crimps your satisfaction right what is that you got to stop and pay I know this sounds absurd but if I said the objective for The Gap is to maximize customer satisfaction what should they do remove the cash registers they'll be bankrupt in two weeks but they'll have really satisfied customers you saying that is absurd act it is absurd but that's what happens you say do I want satisfied customers absolutely why do I want satisfied customers think in Mercenary terms because I want them to come back and buy more of my stuff again if you take a look at the most successful companies and customer satisfaction I can almost guarantee that the two go together I shop at Amazon because I get maximum satisfaction I don't like something I go drop it in a box and soon I think they'll have the box right outside my house you don't want to just drop it that we'll pick it up again let's not make this a choice do you want to maximize stock price or do you want increase customer satisfaction the two usually go together and here comes the final critique of maximizing stock price if you maximize stock prices you must be some kind of a social Outlaw you must not care about society and this gets fed into you watch enough Hollywood movies it gets fed into in terms of the stereotypes you see one of my favorite movies is a movie called other people's money the 1980s movie it's about a hostile acquisition of a telephone cable company see that sounds incredibly boring trust me it's a fun movie to watch because in this movie there's a hostile aquira you know who plays the Hostile aquira a guy called Danny Devo so if you've seen Danny Devo put put you know you know what know exactly what know what comes to mind and the phone company CEO is played by Gregory peek distinguish Noble and here's how the story unfolds Danny DeVito is planning to acquire this telephone cable company and shut it down and lay off the employees so it's a movie right we've set up villain hero and the Gregory peek is going to stop it and this is what makes the movie at least a little bit fun it doesn't have its natural Arc of good guys win the bad bad guys lose the movie's climactic moment moment is at an annual meeting I told you it sounds incredibly dry and boring but trust me this is a fun meeting to be at and Danny Vito gets up and he tells the shareholders why he's shutting the cable and he's saying you guys are going to blame me but the problem with your company is you're making cables and everybody's moved on to fiber optics nobody's buying your product but you can see the the stereotyping so if you think in terms of corporate finance Gregory peek is the anti-corporate finance Danny Deo Corporate Finance crude money oriented and that's the message that you're often delivered is if you care about stock prices you must not be taken care of society and this is at the heart of ESG and some of the other stuff is but but let's step back to do good for society let's say you feel that that is part of what you want to do to do good as for society as a company what is it you first have to do you first have to be be financially healthy and make money do you think GM can afford to be good to society I mean the company is struggling to make it in a market where electric cars are eating up their market share they can't afford to be good I remember when Microsoft in 2018 gave away PCS to every library in the country you that is so magnanimous of them first it probably wasn't that magnanimous they wanted to get people hooked on those awful window operating system while they were young but the other is they were doing so well what's computer and every the when you think about doing well you have to start with a question of am I financially healthy enough to do well the companies that can do the most good are often the companies that are most profitable and valuable it's a problem with ESG scores is whether ESC scores are high because companies I know ESC score people often talk about company high scores are doing financially they're doing well and my question is are the ESC scores leading to companies doing financially well or do or do financially you know companies that do financially well better able to deliver the stuff that makes the ESG Services give them a high score for the most part these These are false choices and much as you might like to say maximizing talk prices means you're breaking every other stakeholders group that's not the way if you look at the broad cross-section it seems to work so here's what I'm going to start with I'm going to start by by to to frame this debate by looking at four linkages that apply in every publicly traded company and I'm going to use those linkages to talk about the utopian world of corporate finance which is where Corporate Finance was born why it breaks and how they play out the linkages here's the first linkage if if you look at a publicly traded company the decisions made of the company are made by managers not the shareholders why this a separation more so in some companies than others because there are some companies where there's a lead shareholder Facebook Tesla who's also the top manager but in many companies there managers sh so first we got to talk about that linkage second there's a linkage between the firm or managers representing the firm and lenders right because lenders lend money to the firm they expect the firm to behave we'll talk about that linkage third if it's a publicly traded company there's a linkage between the firm and financial markets it way works two ways the firm reveals information about itself to the market and the market assesses the price and fourth there is a linkage between firms and Society so I'm going to start with the utopian World from which Corporate Finance was born and what is the word utopian tell you about what I'm going to list on my assumptions when did Utopia exist it did now it's the very fact I'm telling you up front is I'm going to give you assumptions that are patently unreal and I'm admitting it up front but that's where Corporate Finance was born so here are the link the assumptions first you know we assume that stockholders have complete power over managers they can hire and fire managers and the two mechanisms that they have are the annual meeting in the board of directors technically I'm right in practice we can ask whether they actually have that power but technically St and because shareholders have so much power of managers what did what do managers do they do what's right for shareholders they're just so terrified of what shareholders will do to them they put shareholder interest first that's in the utopian world in the utopian World lenders lend money to the firm and they don't protect themselves why because a firm is of good reputation they like the the the managers of honest faces whatever it is they lend money they don't protect themselves and in this utopian World these these loan agreements might have loopholes the size of a Mac Truck nobody takes advantage of those loopholes I told you it's completely unrealistic in this utopian World firms reveal information about what's happening to them to financial markets honestly and on time so if something bad happens you get out there and you reveal it to markets right away and in return markets are rational and cool about the way they react to this information you know what a trading room would look like in a utopian Corporate Finance World it'd be full of intellectual people who think in longterm I don't know if you have ever been in a trading room but intellectual is not the word that is not in on the top 100 list of how you describe the people in the room but in ut toi there they think about information they assess it on cash flows they take a long-term View and they gen adjust the price and this utopian world we do what economists do with a problem they don't want to deal with we just assume it away there are no social costs everything can be traced remember the essence of a social cost it's a cost you create that cannot be traced and charged to you we assume there are no such costs no such benefits in the utopian Corporate Finance World here's what we're doing we're essentially making the world safe for maximizing stock prices because there are no bad ways you can do it right you can't rip off your bond ERS you can't lie to markets you can't create social costs I've taken all what's the only way to increase stock prices in this world you got to go out and produce products and services customers want you got to produce it efficiently sell it make money the oldfashioned way and in this world when you maximize stock prices everybody will benefit from it because it effectively you're not transferring wealth from other people to make your stock prices high so if you look at much of corporate finance Theory and models it's built on this premise that maximizing stock prices does not have the side cost of ripping off the other stakeholders the unfortunate problem is that every one of those linkages I just described the assumptions are made up patently unrealistic so let's get to the real world and talk about what can go wrong because the real question is what cannot go wrong because everything that can go wrong will go wrong let's start with the linkage between stockholders and managers what did I say stockholders have complete power of managers what are the mechanisms annual meeting and board of directors I'm going to argue that neither mechanism is that effective at keeping management line we'll talk about what the annual meetings are very bad forums to get change in a company because of the way they're structured and who shows up and the board of directors seems to be in many companies more interested in protecting the management remember the original objective of a board of directors was not to be a shield for management or a Consulting Group but to Pro to protect the interest of shareholders in practice that doesn't seem the case so shareholders of little power or no power over managers and managers therefore put their interests over shareholder interest it's not because they're B people it's human nature to put self-interest first and if you made me unafraid of you as a group and we'll talk about cases we have to pick is it good for me or is it good for the shareholders manager going to put their interest over shareholder interest if you Lear money and you don't protect yourself what's going to happen you are going to get ripped off it's not a question of weather it's a question of when you're saying doesn't it matter the reputation of the company we'll talk about companies with reputation that we viewed as unable that have borrowed money and taken advantage of lends there are no exceptions so in practice you lend money you don't protect yourself you're going to get ripped off in practice do companies sometimes lie to markets yeah but more often rather than lie what they do is they try to manage the flow of information markets you know what I mean by that they try to delay bad news till a good time comes around we'll talk about what that good time might be they try to bundle it with good news so they're not lying it's not fraud but they're trying to control the flow of information markets and in return our markets rational and cool I mean the earning we're right in earning season right now right I think yesterday Microsoft announced I mean the big tech companies are going to announce in the next few days I want you to wait for the next big earnings announcement that's a big surprise positive or negative right it usually come out after after close of trading on a day so it's it's say it's THS or Tuesday comes out after 4:00 and it contains incredibly bad news on ears Wednesday morning you know what the trading room for that company is going to look like there's no intellectual assessment people just Panic they buy they sell they do something know markets are not rational and cool they often react they often react based on short-term assessments and they sometimes screw up big time and finally in the real world there are social costs and social benefits and it's not just big companies I talked a little bit about that hot dog stand outside that guy's cost me like 5,000 additional steps over my lifetime because he's right in the middle of the sidewalk and I come down that sidewalk and every time I come up the hot dog stand I've got to walk Three Steps the Lev I know it's Petty know it adds about 15 steps a day that's a social cost I don't know how much my know legs are wearing out because of the guy maybe it's good I get good exercise maybe there're social benefits as well but every business creates social costs and social benefits we have all those food BS on Fourth Street right like four that I can count right now there that's good right we have more choices but it does make traffic on Fourth Street a nightmare because it's become a one lane stream so again every organization creates social costs and social benefits acting like they don't exist doesn't make them go away this is the world that I live in and what I want to do is what happens in this world when you ask companies to maximize stock prices so let's start with the first of those linkages between stockholders and managers what did I assume that stockholders have complete power over managers through annual meetings and board of directors and what I'd like to do is take each of those mechanisms and talk about why they've been so ineffective let's start with an annual meeting how many of you are shareholders in a publicly traded company owned stock in a publicly traded company okay quite a few the rest of you probably had to sell your shares to pay the tuition which is what happens when you come back from an MBA how many of you have been to a company's annual meeting anybody a couple of people I own shares in about 40 plus companies now I have never in my lifetime beat to an annual meeting I'll give you an example I own shares in Coca-Cola own them 20 years I've never been to an annual meeting say why not first go to an Coca-Cola annual meeting what do I have to do I have to fly to Atlanta the airfare from New York to Atlanta for some reason I think it's fixed it's just way too ID got me $600 round trip once I get to Atlanta what do I have to do do I have to stay in that peach whatever section of Atlanta is for about three nights two nights it cost me another $400 $500 altogether this whole thing is going to cost me like $1,500 that's going to wipe out my profits on Coca-Cola this year if I did that it doesn't make economic sense for most of us unless you happen to be in the city in which maybe living next door to the place where the annual meeting is going to do I would even take the subway to an annual meeting that's $5 off my returns I don't want to do that right so most people don't show up at annual meetings that's absolutely a fact but at least in theory even though I could not go to an annual meeting in person they gave me a way to be at the annual meeting kind of indirectly right what do you get if you're a shareholder in a company and there's an annual meeting coming up what is it that you have the do you get it used to be in the mail but now now it's online what do you gety proxy I still get proxies and you know what the first reaction when I get that big fat proxy envelope is if I'm feeling socially conscious it's going in the recycling if not it's going in the trash I'm not even opening up that envelope to see what's in it and I'm not alone most people who are shareholders get these proxies do not return the proxies back to the company so I have a question about because when if I have a th000 shares in Coca-Cola that's a th000 votes I'm throwing it in the recycling or trash what happens to those votes at most publicly traded companies those proxy votes that never get returned what do you think should happen people don't vote it's not a vote on either side right but in almost every company those proxy votes that don't get returned get counted as votes for incumbent management and I'll give you the analogy this is like having an election where the incumbent gets the votes of everybody who doesn't show up to vote no incumbent would ever lose an election right it's it's a system designed to give incumbents more power so if you look at annual meetings most small stockholders don't go the proxies don't get returned he's saying but what about the big stockholders who are the biggest shareholders almost every big publicly traded company in the US now B Black Rock and and Vanguard you it's not just us you look across the world Black Rock Vanguard because what kind of they're institutional investors but black Black Rock and Vanguard are very specific kinds of Institutional Investor they what do they do it's mutual funds but they're actually index funds what's the index fund Vanguard the five vanguard's biggest fund is the Vanguard 500 Index Fund which owns every single S&P 5 you're saying so what you own 500 companies in this case you can't stay and fight you basically so they might show up but they basically are in there they'll vote with Inc commit management they and if it's an active fund they just they don't like the way you run what what are they going to do sell and move on they vote with their fee you know what institutional investors vote with incumbent managers 90 to 95% of the time so if you're saying those big investors are going to show up at meetings and act questions you're missing the point no actually check in on a meeting and you're going to see how few questions come from institutional investors so when you look at annual meetings they're extraordinarily scripted now you can't go to an annual meeting say I have a proposal it's not going to show up you got to get that proposal through it's got to be accepted before it even shows up for a vote and you got to jump through multiple Hoops to get there that's why it's so difficult to get a no vote against incumbent managers in an annual meeting I'll tell you give you an example of how difficult it can be about 10 years ago Jamie Diamond you know Jamie Diamond is Right CEO of JP Morgan who sat on the board of directors decides he's also going at that time JP Morgan had done the right thing the CEO was not the chair of the board but Jamie Diamond decides he's going to be chair of the board and sheres did not like it so it came up they actually managed to get this vote at the annual meeting the resolve that jam diamond should not be chair of the board you think this vote would get a majority vote right but if you look at the actual vote numbers 67% claim to have voted for Jamie Diamond to be chair and 33% voted no but it's a complete deception because almost everybody who voted actually voted no but because you so many proxy votes and institutional investors voting automatically you start with 67% anytime you see a no vote exceeding 20% of publicly traded company there's something going on under the surface where people are unhappy but it doesn't change because you still have this fixed system saying what about the board of directors what about them first take a look at know take any company where are your shareholder where you to work pick up the annual report look at who sits on the board the names and ask yourself a question who came up with these names in most companies who comes up with the names of the people who sit on the board it used to be the CEO now there are nominating committees which do it but let's face it that nominating committee is not putting a name on the list before checking with the CEO so let's play a game you're the CEO of a company you got to put together a board of directors and what's the job of the board to keep an eye on you and you have two choices one is you can pick the 10 or 12 most informed intelligent questioning people in the world that's Choice One the second is you can walk into your local Country Club walk into the bar area look for the 12 most sloshed people you can find say would you like to sit on my board ask yourself which makes your life easier again it's not bad or good people it's human nature company know CEOs when they pick directors tend to pick directors John Mack when he became CEO Morgan Stanley the first three people he hired happen to be members of his country club I didn't have a chance to check their bar tabs that's a little suspicious how did the three best people to pick put on your board happen to be hanging out at your country club for the most part directors don't own shares or if they have shares they given the shares there's a very big difference between buying shares and a company and being given the shares they have tiny Equity Stakes you're saying so what you're a director in a company you get a pretty hefty compensation package not just what you get paid typical director in the US gets paid $200 to $250,000 in addition you get pensions for life do you know that in many companies if you're a director even for two or three years you get a pension for the rest of your life you get paid as a director and you own 100 shares in the company which one is going to outweigh the other to a director is going to think in terms of heyy that I'm getting a pretty hefty package I don't want to rock the board and I've never understood people who are directors in 11 companies how the heck do you have the time to actually do all of this stuff Henry Kissinger was in the board of directors of 15 companies what exactly is Henry doing on your board he was in the teros board at the age of 92 what exactly I mean what he come talk about the Iron Curtain and every a blood testing company what's the Iron Curtain Got to Do with It the reality is many directors don't have the time or the resources to do any kind of research to ask tough questions we've always known this is a corporate governance problem and if you look at now what can you do about this it turns out that the fixes you make don't quite do the job because again director meetings are very scripted Robert's Rules of Order you can't bring up stuff that's not supposed to be there there's this big push it's human nature to be a team player right there are nine people on the board you don't want to be this skunk at the party you don't want to be bringing up questions that make everybody uncomfortable and here's the biggest and this is a psychological issue in Psychology there is a substantial amount of re research on what are called authority figures that when somebody's anointed and authority figure even when you disagree with that person you tend to hold back because that person knows more than I do when you're the board of directors for a publicly traded company the CEO is on the board and the CEO says trust me this China project is going to make money part of you doesn't trust the CEO but he said but that person knows more than I do you know who's on Elon you know first how many directors Tesla has five Elon is on the board anybody else want to guess Kimble his brother's on the board don't let me he says it's an objective third party director I'll go along for the moment five people can you imagine being a director at Tesla and Elon comes in and says we're going to do go full speed on automated driving an FSD would you I mean in the abstract I would question him would you really question Elon musk on FSD because you you don't have a background in electric cost this guy's built three companies he's got no he's sending off satellites to outer space and used to be a food processing top manager he said okay I think that all of I mean we tried in the early part of the century to Naran Oxley we tried to make boards more effective by making them more independent that was a big p SB oy and 20 years later he's saying why isn't it creating better corporate governance the answer is we can make create a board which is independent and completely ineffective you know you know if you really want to pick Boards of directors that are effective I think we need to borrow from the Catholic church I'm not Catholic but my wife is and for 30 plus years every Sunday I go I know when to kneel when I know I've got this whole thing nailed down now but the Catholic church is a Survivor right 2,000 years it's managed to find a way to keep itself Central so we should probably learn something from know sustainable right it's clearly made itself sustain them so here's what the Catholic Church found was happening in the 14th century that they wanted to stop they found that too many people were becoming Saints you know how the process of sainthood works in the Catholic Church know somebody from Spain will show up and say so and so is a saint and then they present examples of Miracles that would that happened and the 14th century what was happening is people would show up from all over the world saint here are the Miracles and nobody had the time of the resources to push back so basically the people advocating for Saints were getting this know Pathway to becoming Saint there wasn't enough with you know anybody with enough incentive to spend the time and the resources to stop them so you know what the Catholic Church created to slow the process Down The Devil's Advocate amazing name for what's the devil's advocate's job let's say you show up from Spain he says so and so is a say these are the nine Miracles you know my job is I'm giving the resources I go check each of your Miracles out not a miracle not a miracle not a miracle so my job is I'm giv the power and the resources to push back how this work in a board of directors who's the authority figure the CEO he has or she has all the resources there so the CEO gets up and said trust me this is a good acquisition they get Goldman Sachs put the charts up look at the Synergy look at this look at that you know what you need in that that room a counter CEO a devil's advocate with his own Banker or her own Banker saying hey no Synergy there that growth rate looks a little shady to me I know it sounds impractical but we need almost a counter power in that room for this to actually work so I'm going to leave you with Disney Circa 1997 in my view this is the worst board created at a large publicly traded company in history that's quite a contest to win so I'm going to at least start to lay out the basis for why it's such a bad board first there are 17 people on the board he saying so what I want you to try to experiment it's almost lunch time right I want you to get together as a group of 17 and decide where to go for lunch I'll make a prediction you will not eat today right 17 people in a room nothing ever gets done second eight of those 17 members were insiders they work for Disney you know they used to work for Disney which means you're overseeing yourself strike two strike three who's the chair of the board a guy called Michael Eisner who also happens to to be the COO tell me how this works again you chair the board that oversees what you do and you tell me whether you're doing a good job I don't think that quite works and I leave you with the final strike three strikes you're out in baseball but in this case I'm going to give them a fourth strike he say what about those outside directors they must be bringing something to the table right let's see a couple Rea BS head of an elementary school in Los Angeles he this is good Disney is a kid oriented company get an elementary school principal coincidentally she happened to be the principal of the elementary school that Michael eisner's kids went through okay then there's father Leo Donovan any Georgetown grads here so it's good to have some religious influence on this hean board right but again coincidentally otherwise Michael eisen's son went to Georgetown he sat in the board of Georgetown I'm not suggesting there's any quid quo prob but it doesn't quite pass the smell test and here's the topper on the cake on why this is a bad board as you go down there's wiwin e Russell attorney at law you're saying what do you have against lawyers an entire reams of stuff but this is not the forum for it but this guy was Michael eisner's personal attorney how do you pull this off it's an objective it's nice to have your lawyer in the room he's probably saying Mike don't answer that question take the fifth on that one M no but don't tell me is it and finally Sydney poier great actor right in fact he made the list of top 10 directors in 97 of directors who missed the most meetings so guess who's coming to dinners guess who's not coming to the meeting today this is a rubber stamp board and we start next class we're going to talk about what happens when you have a rubber stamp board and whether that's changed in the last 20 years than