Speaker 1: This is making a killing. I'm Bethany McClean. I hope
Speaker 1: you've enjoyed the series so far. Thanks very much for downloading.
Speaker 1: This show cuts through the hype and noise to reframe
Speaker 1: the stories you thought you understood and uncover the ones
Speaker 1: you didn't know were important, like Alex Gibney talking about thoroughness,
Speaker 1: seth Godin on Amazon and Joe Knows Sarah on Jewel.
Speaker 1: They call it shart termism. It sounds like a disease,
Speaker 1: and actually it is a disease, one that could have
Speaker 1: pretty dire consequences for all of us. In the business world.
Speaker 1: Short termism manifests itself in an intense focus on next
Speaker 1: quarters results, not next year's, and god forbid, not a
Speaker 1: decade from now next quarter. To an alarming degree, as
Speaker 1: we'll be discussing, this pressure leads businesses to engage in
Speaker 1: fraud in order to present Wall Street with the quarterly
Speaker 1: earnings results it wants to see, think and run. But
Speaker 1: that's actually only the tip of the proverbial iceberg. The
Speaker 1: more damaging effects are a little harder to see. The
Speaker 1: way a focus on producing profits now can divert research
Speaker 1: and development dollars that could have invented, say, a life
Speaker 1: saving drug, and done what business is supposed to do
Speaker 1: by making the world a better place. So it was
Speaker 1: a good thing when Warren Buffett, obviously a business icon,
Speaker 1: and Jamie Diamond, the CEO of JP Morgan Chase Wait
Speaker 1: And last spring with an op ed in The Wall
Speaker 1: Street Journal entitled short Termism is Harming the Economy. They
Speaker 1: argued that public companies should reduce or eliminate the practice
Speaker 1: of estimating quarterly earnings because they argued, it often leads
Speaker 1: to an unhealthy focus on short term profits at the
Speaker 1: expense of long term strategy, growth and sustainability. Well yeah,
Speaker 1: but over the years there have been others. In early
Speaker 1: twenty sixteen, Larry Think, the chief executive at Blackrock, the
Speaker 1: world's biggest investor with almost five trillion dollars under management,
Speaker 1: sent a letter to chief executives at S and P,
Speaker 1: five hundred companies and large European corporations. He also urged
Speaker 1: quote resistance to the powerful forces of short termism afflicting
Speaker 1: corporate behavior. That was three years ago, so it's not
Speaker 1: clear what effect, if any, thinks missive is having. Concerned
Speaker 1: voices have been buzzing about this since oh, at least
Speaker 1: the days of Enron, And really none of it seems
Speaker 1: to make a damn bit of difference. So does all
Speaker 1: of this mean that capitalism has a problem? Is this
Speaker 1: part of the reason that a lot of people, particularly
Speaker 1: in the US, the bastion of capitalism, don't seem to
Speaker 1: like or trust business very much anymore? Here to talk
Speaker 1: about this and more is Sheila Kolhatkar. Sheila and I
Speaker 1: first met Jonzaco, and we were drawn to each other because, well,
Speaker 1: we like each other, and because we both worked in
Speaker 1: finance before coming to journalism. She's now a New Yorker
Speaker 1: writer who wrote the best selling book Black Edge, Inside Information,
Speaker 1: Dirty Money, and the Quest to bring Down the Most
Speaker 1: Wanted Man on Wall Street, a man who not incidentally
Speaker 1: made his fortune on short termism. But I swear we're
Speaker 1: going to find some optimism amid the gloom. Okay, I
Speaker 1: promise we're going to try, so, Sheila, before we really
Speaker 1: dive into this, let's talk about why people should care
Speaker 1: about this disease of short termism. I would start off
Speaker 1: by asking someone, have your wages gone up? Has the
Speaker 1: medication your mother needs to treat her dementia? Has that
Speaker 1: become so expensive that you can't afford it. Do you
Speaker 1: know people who've been laid off. Has the big factory
Speaker 1: in the town where you grew up closed? You know?
Speaker 1: Are there a lot more people out of work than
Speaker 1: there used to be. All of those things are connected
Speaker 1: in some way to decisions that companies and policymakers are
Speaker 1: making that are focused much more on short term interests.
Speaker 1: So short termism sounds abstract, but it's actually incredibly real
Speaker 1: in the sense that it's the paycheck in somebody's pocket
Speaker 1: every week. It's the medication they might need to cure
Speaker 1: a chronic disease. What sounds like an abstract concept is
Speaker 1: actually anything, but it's very concrete in terms of the
Speaker 1: impact it has on people's lives. It's really connected to
Speaker 1: almost everything. One of the things I say a lot
Speaker 1: is that business stories are always stories about people, and
Speaker 1: that you've got this great character in the PC road.
Speaker 1: So tell us who is Ron Shake and what made
Speaker 1: you care about him. Ron Shake is the founder of
Speaker 1: Panera Bread, which is this wildly successful fast casual sandwich chain.
Speaker 1: It's one of the most successful restaurant companies in the US.
Speaker 1: Ron will tell you very excitedly and show you charts
Speaker 1: of the Panera stock price and how well it performed.
Speaker 1: I came to be interested in him through this sort
Speaker 1: of roundabout way. I have been doing a lot of
Speaker 1: long form pieces for The New Yorker where I work,
Speaker 1: and one of the themes that comes up a lot
Speaker 1: in them is the way that a lot of businesses
Speaker 1: are being pressured by Wall Street investors to just be
Speaker 1: very focused on short term interests and short term things
Speaker 1: that will cause their stock prices to go up. Absolutely
Speaker 1: the curse of our time, right, yes. And I could see,
Speaker 1: partly because of my obsession with this, partly because I
Speaker 1: have a financial background, that there's a connection between the
Speaker 1: fact that this is happening and all this other chaos
Speaker 1: we're seeing in our political and economic world, and the
Speaker 1: Trump presidency, the political polarization, all these debates about rural
Speaker 1: voters in the Midwest and why they were drawn to
Speaker 1: President Trump's message. There's a connection between these two things.
Speaker 1: And I was struggling to find a way to illustrate
Speaker 1: that connection, and along came Ron Shake, who is a
Speaker 1: very interesting, successful, compelling guy, but who also sort of
Speaker 1: embodies this connection and the tension between long and short
Speaker 1: term interests, and I had the good fortune of sitting
Speaker 1: down to talk to him. It's one of the things
Speaker 1: that drew media your pieces this larger picture behind it, right,
Speaker 1: that Shart Tramism in business is not just a business
Speaker 1: world issue. It's actually has all these bigger ramifications. But
Speaker 1: we'll get to that. Going back to Ron, what made
Speaker 1: Panera so successful. The interesting thing about Ron is that
Speaker 1: he has a real knack for recognizing gaps in the market,
Speaker 1: particularly in the food restaurant world. And he started Panera
Speaker 1: in the well he started the company that became Panera
Speaker 1: in the early eighties. He began with a simple cookie
Speaker 1: shop in Boston, and very quickly he recognized that there
Speaker 1: were a lot of office workers in Boston who didn't
Speaker 1: have anywhere to eat lunch that you know. Their options
Speaker 1: were McDonald's are sort of a more formal, old fashioned
Speaker 1: sit down restaurant, and he could see that people were
Speaker 1: becoming a little more health conscious. So through a series
Speaker 1: of kind of mergers and he took over Obopa. He
Speaker 1: started serving soups, salad, sandwiches to this like busy but
Speaker 1: health conscious cohort of office workers. So he saw an
Speaker 1: opening to provide people with a different type of food
Speaker 1: than they'd had previously. But he also did other things
Speaker 1: that were different that you detail in your story. What
Speaker 1: were some of those things that were really innovative from
Speaker 1: a business point of view. One of the things he
Speaker 1: talks about a lot is that he really wanted to
Speaker 1: make his restaurants welcoming. He wanted to make them into
Speaker 1: places where you might hang out or have a meeting.
Speaker 1: You would say, oh, you could have a business meeting,
Speaker 1: a job interview, a church meeting, sort of the way
Speaker 1: Starbucks did around the same time, and even Barnes and
Speaker 1: Noble when it was really up and coming, you know,
Speaker 1: having couches and comfortable seating. And he also started one
Speaker 1: of the first restaurant loyalty programs where you could like
Speaker 1: earn points and rewards for eating there. He also sort
Speaker 1: of later in the company's evolution, introduced different ways of ordering.
Speaker 1: You know, you could order on your phone, you could
Speaker 1: order online, you could call so multi platform, multi channel
Speaker 1: ways of stuff that seems obvious now but wasn't at
Speaker 1: all when he did it. Right, there's this point I
Speaker 1: wanted to pause on this quote in your piece I Love,
Speaker 1: which is from him, but he says they wanted food
Speaker 1: they felt good about. They wanted environments that engage them,
Speaker 1: they wanted people that cared. Shake said basically they wanted
Speaker 1: to feel respected by their food. And what fast food
Speaker 1: had become was a commodity. It had become nutritional cocaine.
Speaker 1: And I thought, is there a parallel here between what
Speaker 1: people want in food and what they want in capitalism
Speaker 1: and short termism in a sense financial cocaine. Well, that's
Speaker 1: what's great about the story, because yes, it's it's like
Speaker 1: a little microcosm of the larger issues we're dealing with,
Speaker 1: which is there was this huge upsurge in cheap, easy,
Speaker 1: ultimately damaging food, drink, even the coffee at that time
Speaker 1: was just this very mass market. You know, he mentioned
Speaker 1: Maxwell House at one point. I mean, the whole consumer
Speaker 1: brand market was dominated by these huge companies Coke, Pepsi,
Speaker 1: Maxwell House that were creating products that were ultimately sort
Speaker 1: of garbage, inexpensive, you could grab and go. And yes,
Speaker 1: that is something we've obviously been accustomed to in the
Speaker 1: larger economy and sort of the source of many of
Speaker 1: our deeper problems. I do kind of look at almost
Speaker 1: all major news events as ultimately financial stories, if you
Speaker 1: peel back the threads, if you really dig into almost anything,
Speaker 1: there is a financial agree I think there's a huge
Speaker 1: advantage in looking at the world that way because you
Speaker 1: see through a lot of stuff that people who aren't
Speaker 1: looking for that might miss. And therefore, when you see
Speaker 1: someone like President Trump gathering up all sorts of votes
Speaker 1: from out of work factory workers in states that are
Speaker 1: experiencing like economic depression, you know, all the dots are connected.
Speaker 1: For me, I can very easily see how changes and
Speaker 1: trends in finance, you know, the rise of private equity, offshoring,
Speaker 1: all these things ultimately trickle down into these real world effects,
Speaker 1: doesn't it. In no way when you look back on
Speaker 1: your early experience and finance back in the round two thousand,
Speaker 1: doesn't seem like a more naive time in a sense,
Speaker 1: and that we were perhaps more willing to believe some
Speaker 1: of the cynicism that it afflets us now hadn't really
Speaker 1: said in yet, And the short termism that is so
Speaker 1: pervasive seemed like a temporary blip or something that was
Speaker 1: fixable or is that just me? I absolutely look back
Speaker 1: on even you know, even ten years ago, things seemed
Speaker 1: a little quaint sometimes to me in light of what's
Speaker 1: going on now. I mean, what's happened really is just
Speaker 1: a lot of the facade that used to be covering
Speaker 1: over everything has been removed. I think the financial crisis
Speaker 1: was the beginning of that that really pulled the shades
Speaker 1: off of everyone's eyes. I mean that was really a
Speaker 1: period when a lot of people became kind of radicalized
Speaker 1: in their views and their cynicism about Wall Street. Right
Speaker 1: shocking that you could look at these big companies with
Speaker 1: their tens of thousands of employees and their billions of
Speaker 1: dollars in market cap and there gleaming skyscrapers in New
Speaker 1: York and they could be so fragile. And then you
Speaker 1: have antidotes to those stories like Iran shake who built
Speaker 1: something real right and he got rewarded for it. Didn't
Speaker 1: he did, He did, He did well personally, He made
Speaker 1: a killing in the best of ways, in the sense
Speaker 1: that he created a successful business and got paid for
Speaker 1: having done so. Absolutely. I mean he became very wealthy
Speaker 1: personally as a result of exactly what we want people
Speaker 1: to do in our economy, which is he had an idea,
Speaker 1: He risked his capital and his time, he invested, he
Speaker 1: built his company, he innovated, he created jobs. You know,
Speaker 1: he helped move the food industry into a healthier direction.
Speaker 1: And yes, he did very well as a result, and
Speaker 1: that's exactly what business should be about. Right. Does he
Speaker 1: think he could do it today? No, I mean, this
Speaker 1: was one of the reasons he was so interesting to
Speaker 1: talk to because he feels very strongly that it would
Speaker 1: be difficult, if not almost impossible, to do now what
Speaker 1: he did then as a result of a whole bunch
Speaker 1: of factors. But this rise in short term pressures is
Speaker 1: sort of the number one culprit he would point to.
Speaker 1: Did he feel like he had to push back on
Speaker 1: that even while he was building his company, He absolutely did,
Speaker 1: I mean he In twenty seventeen, Ron decided to take
Speaker 1: Panera private, and he ended up joining forces with a
Speaker 1: private equity firm that he felt had sort of longer
Speaker 1: term goals for the company, because he felt that being
Speaker 1: publicly traded company and being subject to the whims of
Speaker 1: the stock market in the current environment was undermining the
Speaker 1: company's ability to grow and innovate and really made it
Speaker 1: almost impossible to run and build a successful business. So
Speaker 1: he seemed to believe. It was one note that actually
Speaker 1: made me a little skeptical that he seemed to believe
Speaker 1: that private equity was part of the solution. Does he
Speaker 1: actually believe that? And do you believe that because I
Speaker 1: tend to think of private equity as part of the problem.
Speaker 1: That's a fair question. I think, like activist hedge funds,
Speaker 1: private equity firms come in all different stripes, and there
Speaker 1: is one version of private equity investing that serves a
Speaker 1: valuable purpose in the market. I mean, in theory, private
Speaker 1: equity investors are looking for troubled businesses, businesses that could
Speaker 1: use a little capital investment, maybe some new strategy, the
Speaker 1: ideas that they're going to go in there, they're going
Speaker 1: to make investments, they're going to change management, and then
Speaker 1: ultimately leave the company in a stronger position. I mean,
Speaker 1: that's the theory, and that is of course, occasionally, or
Speaker 1: perhaps sometime in the past, it often worked like that,
Speaker 1: where you would have an investor who would be incentivized
Speaker 1: to try and help fix or improve a company. And
Speaker 1: of course there are even examples of companies that are
Speaker 1: really doing things wrong where activist investors might call that
Speaker 1: out and point out severe problems that slogan of private
Speaker 1: equities that it allows businesses to focus on the long term.
Speaker 1: It's become a marketing slogan that I worry is devoid
Speaker 1: of substance in many cases, because I think the private
Speaker 1: equity owners put as much pressure on the business to
Speaker 1: generate profits as the public markets do so that they
Speaker 1: too can turn around, flip it, take it public again,
Speaker 1: and get their money out. Because that short term pressure
Speaker 1: has become relentless investors as well. Right, Yes, and I
Speaker 1: think many of those private equity deals are structured so
Speaker 1: that the investors make money even before they flip the company.
Speaker 1: I mean they're paying themselves dividends. They're making the company
Speaker 1: borrow money to pay the private equity firm fees for
Speaker 1: managing the company. You know, they forced the companies to
Speaker 1: sell all their real estate and unlease it back. They
Speaker 1: weaken the companies so then when there's a real hiccup
Speaker 1: in the business environment, there is no cushion there to
Speaker 1: help the company weather that. That practice that you just
Speaker 1: mentioned of private equity firms taking dividends by loading a
Speaker 1: company up with debt and figuring out a way to
Speaker 1: pay themselves, in effect, before they've done anything to earn
Speaker 1: that payday to me, is just a complete betrayal of
Speaker 1: what private equity is supposed to be about. Yes, agreed,
Speaker 1: I mean the incentives are very messed up, And I
Speaker 1: wrote about toys ARUs recently that's a very good example.
Speaker 1: I mean, there are obviously a whole bunch of challenges
Speaker 1: facing a company like toys Rus and Amazon is a
Speaker 1: huge one, But when you really look at the details
Speaker 1: of what the private equity investors did and only sears
Speaker 1: is a bit of a similar story. I mean, the
Speaker 1: argument is that their interests are supposed to be aligned
Speaker 1: with those of the company and of the longer term
Speaker 1: stakeholders in that company. But what they've managed to do
Speaker 1: is figure out a way to make their money no
Speaker 1: matter what. So they're not really aligned. They're not really
Speaker 1: taking a big risk that creates all sorts of inverted
Speaker 1: perverse incentives and leads to all these companies that could
Speaker 1: have probably been saved just being sent into bankruptcy. So
Speaker 1: I want to pause on this notion of incentives and
Speaker 1: compensation because I often feel like the quest for the
Speaker 1: right compensation system it tends to be the law of
Speaker 1: unintended consequences. Right everybody comes up with a compensation structure
Speaker 1: that they think is brilliant, I mean stock options, What
Speaker 1: could be better, right, aligning and executive's interest with the
Speaker 1: head of shareholders. And then, of course executives figured out
Speaker 1: ways to basically game the system such that they could
Speaker 1: get paid in the short term whether or not their
Speaker 1: companies did well. The best example is Actually and Run,
Speaker 1: where the top two hundred executives I'm going to be
Speaker 1: directionally right about this number, got over a billion dollars
Speaker 1: in stock option compensation in two thousand, which was Enron's
Speaker 1: last full year of existence before it went bankrupt. I mean,
Speaker 1: if you need a fact to show how absurdly unaligned, right,
Speaker 1: stock option compensation can be. There's this great stat from
Speaker 1: the IMF, the International Monetary Fund, and they say, pension funds,
Speaker 1: insurance companies, mutual fund, sovereign wealth funds hold over one
Speaker 1: hundred trillion dollars in assets and they're managing money on
Speaker 1: behalf of all of us, right, And so you'd think
Speaker 1: that haven't obvious interest in long term value creation, right,
Speaker 1: because that's what we all want, is long term value creation.
Speaker 1: And yet all these players are encouraging short termism. Too,
Speaker 1: Why what's gone wrong there? Why can't we align capital
Speaker 1: with capitalism. This came up a lot around some of
Speaker 1: these high profile bankruptcies we've seen recently that involved private
Speaker 1: equity investors, because I think in the case of Choice
Speaker 1: r US, where many of those workers just got very
Speaker 1: badly burned or you know, we're owed money or didn't
Speaker 1: get severancy expected, a lot of pension fund investors were
Speaker 1: sort of like, hey, wait a second, like why are
Speaker 1: we putting money with these private equity firms when they're
Speaker 1: then going out and dumping our members pensions onto the
Speaker 1: fire the second that you know, things get tough at
Speaker 1: the company. It doesn't do you a whole lot of
Speaker 1: good if your pension fund is making money, but the
Speaker 1: way it's making money is costing you your employment, right,
Speaker 1: and something very twisted about that tell us about Shake's
Speaker 1: battles with activist investors. He had to fight them off too,
Speaker 1: didn't he. Even with everything he'd done, he still had
Speaker 1: to defend off attempts to change his strategy. Well, that
Speaker 1: was it he I don't think he had one of
Speaker 1: the most drawn out, brutal activist investor fights of all time,
Speaker 1: but it was notable he had a couple of different
Speaker 1: activists take positions in his stock. He told me that
Speaker 1: often the things they wanted him to do, he felt
Speaker 1: were kind of undermining of the longer term goals and
Speaker 1: interests of the company. And one of the things that
Speaker 1: they wanted him to do is raise prices. You know,
Speaker 1: I'm sure someone an analyst at one of those funds
Speaker 1: kind of crunched the number of Panera and said, you
Speaker 1: know what, you could get these people to pay like
Speaker 1: x percentage more for these sandwiches. You should charge more.
Speaker 1: But he had very strong feelings about customer loyalty, and
Speaker 1: he wanted people to have a really positive feeling about
Speaker 1: their experience at Panera and to want to come back.
Speaker 1: And he thought, you know, that might kind of juice
Speaker 1: up earnings in the near term, but over time, we're
Speaker 1: going to lose customers. You know, we're not going to
Speaker 1: have the same loyalty that we used to. Someone else
Speaker 1: could come into the market with a cheaper product and
Speaker 1: draw them away. So he resisted that he felt he
Speaker 1: had some position of strength when dealing with these activists
Speaker 1: because the company had been so successful, But even still,
Speaker 1: he eventually decided that he couldn't risk having his decision
Speaker 1: making undermined, and he made it. He told me a
Speaker 1: story about how they'll often send in an analyst, you know,
Speaker 1: some business school graduate decades younger than the company founder
Speaker 1: or the CEO, and this analyst will say, well, you know, sir,
Speaker 1: I think you could think you could try just raising
Speaker 1: the prices a little bit. I've got this spreadsheet. Ron
Speaker 1: was just seemed a little insulted by that. Frankly, I
Speaker 1: can imagine what's interesting. It makes me think back because
Speaker 1: I remember someone saying to me years ago that one
Speaker 1: of the signs of a business that was going to
Speaker 1: face trouble was one that didn't leave a nickel on
Speaker 1: the table. I didn't really know what that meant at
Speaker 1: the time, but I think when you do extract every
Speaker 1: possible bit of earnings from your customers, from your from
Speaker 1: your suppliers, in the end, if you don't leave crumbs
Speaker 1: for other other people, if you are taking every single nickel,
Speaker 1: it's a form of short termism, and it's a form
Speaker 1: of disrespect for the ecosystem in which you exist. Right absolutely,
Speaker 1: I think the whole thing is steeped in a sort
Speaker 1: of contempt for the other the other parts, the other
Speaker 1: the event, that's a great phrase, the other the other
Speaker 1: entities who have interests in the company. Um, it's also
Speaker 1: undermining of your own interests because, um, you know, the
Speaker 1: moment there's a bump in the road, that company will
Speaker 1: not have any any ends, any friends, any gas in
Speaker 1: the tank, like pick your cliche metaphor to whether that challenge,
Speaker 1: you know, and then they have to go into the
Speaker 1: spiral or even more cost cutting and yep, leaving the
Speaker 1: nickel on the on the table creates give them the system. Yes,
Speaker 1: if you had to vote activist investors thumbs up, thumbs down.
Speaker 1: I've been asked this before. You know, would you just
Speaker 1: ban hedge funds if you could? No, I mean I
Speaker 1: wouldn't ban all activist investors. However, I do think we
Speaker 1: need to rethink tax policy, regulatory policy. We need to
Speaker 1: find ways to perhaps make it less financially attractive to
Speaker 1: do this short term trading and more attractive create greater
Speaker 1: incentives for longer term investment. In a really interesting way,
Speaker 1: I think your current focus in your current work connects
Speaker 1: to your wonderful book Black Edge, because in some ways,
Speaker 1: the Steve Cohen's story is the story a very short
Speaker 1: term capital Right, would you argue that his worldview, that
Speaker 1: short term worldview has done damage to capitalism above and
Speaker 1: beyond the damage of just the Steve Cohen's story. Well,
Speaker 1: he's part of a system. He's part of a group,
Speaker 1: very large and influential group of mostly hedge fund investors
Speaker 1: who are interested in, yes, short term trading, I mean
Speaker 1: essentially gambling informed gambling, you might say. And I don't
Speaker 1: want to put all of the ills of our economy
Speaker 1: at Steve Cohen's feet, of course, but the fact is
Speaker 1: that this type of investing that he represents has absolutely
Speaker 1: contributed to this pressure. And one of the moments I
Speaker 1: wrote about in the book that really stood out to
Speaker 1: me was the sort of key trade that occurred that
Speaker 1: ended up being a focus of the trade, Right, the
Speaker 1: Dell trade. Dell was, you know, Dell was going to
Speaker 1: report earnings, which companies do every three months, and you
Speaker 1: had all of these young men, they were all men
Speaker 1: in this case, many of them prought of our finest
Speaker 1: colleges and boarding schools, and there they were, you know,
Speaker 1: with their Bloomberg screens. They spent months, weeks, months trying
Speaker 1: to figure out what the gross margin number was going
Speaker 1: to be for Dell's quarterly earnings report, and they wanted
Speaker 1: to know, down to like a quarter of a penny,
Speaker 1: what that gross margin was going to be. They had
Speaker 1: to kind of figure out what this particular metric, what
Speaker 1: this number was going to be, what the market was expecting,
Speaker 1: and that using those two pieces of data, they could
Speaker 1: try and anticipate what the stock would do when the
Speaker 1: information finally became public. And this led many of them
Speaker 1: to you extraordinary lengths to try and get that information,
Speaker 1: and of course the government felt it was very suspicious
Speaker 1: and ultimately charge some people over that trade. But what
Speaker 1: was remarkable to me was that, you know, you have
Speaker 1: all these really highly educated, able bodied people, and that
Speaker 1: was what they were spending their day doing, trying to
Speaker 1: guestimate to Dell's gross margins. And I just thought it
Speaker 1: was just such a misallocation of intellectual talent and our economy,
Speaker 1: Like those people could have done so many amazing things.
Speaker 1: They could have started companies, they could have been teachers
Speaker 1: or doctors or whatever, and this is what they were doing.
Speaker 1: And a lot of people are now leaving Harvard and
Speaker 1: Yale and Wharton Business School and going to do that
Speaker 1: all day. That seems to be a misallocation of intellectual
Speaker 1: talent to steal your phrase on a grand scale. Right.
Speaker 1: Also the flip side of it, which was that the
Speaker 1: people at Dell, like the investor relations staff at Dell,
Speaker 1: had to try and manage expectations of all these investors
Speaker 1: because their stock was liable to swing wildly, and part
Speaker 1: of their job was to try and like keep things
Speaker 1: under control and like just let people know just enough
Speaker 1: so that there weren't any big shocks and the stock
Speaker 1: wouldn't plummet or shoot up. Seemed just like a big waste,
Speaker 1: and it did, right. They downmissed the gross margin forecast
Speaker 1: by like a tiny sliver, and that sent the stock
Speaker 1: into this tailspin, and people made tens of millions of
Speaker 1: dollars off this trade. And making tens of millions of
Speaker 1: dollars in a way that's just playing quarterly earnings results, right,
Speaker 1: It's not making tens of millions of dollars because you've
Speaker 1: built a new something it's going to make the world better. Yeah. Oh,
Speaker 1: it's a lot easier to make the millions of dollars
Speaker 1: gambling than to go do the hard work. I mean,
Speaker 1: it is much easier to just pick the right side
Speaker 1: or perhaps get information so you don't even have to
Speaker 1: risk being wrong. That's actually an extremely scary statement that
Speaker 1: it's easier, right, That it seems easier, and that's part
Speaker 1: of our own culture of short termism and how it's
Speaker 1: spread beyond just quarterly earnings. So I want to go
Speaker 1: back to the headline of your story, because this is
Speaker 1: the bigger picture argument for why this matters, Right, that
Speaker 1: Shake's got this argument that short termism isn't just a
Speaker 1: business world phenomenon. It's not just a problem for a business,
Speaker 1: but it's actually changing and shaping our society. Right, can
Speaker 1: you tell us about that. Well, one thing you said
Speaker 1: to me is, well, if you're a blue collar worker
Speaker 1: in Michigan or Pennsylvania or Iowa, and you're on a
Speaker 1: plant floor assembling furniture or car parts or whatever it is,
Speaker 1: and you know, suddenly your company falls on hard times.
Speaker 1: They close the manufacturing facility near your town. It's sitting
Speaker 1: there like a rotting shell on the landscape. Instead, a
Speaker 1: Walmart opens up or an Amazon distribution center opens up.
Speaker 1: So now instead of having sort of a unionized, relatively
Speaker 1: well paying job working in this factory, you can now
Speaker 1: go work for a minimum wage as a checkout cashier
Speaker 1: at Walmart and apply for food stamps to help make
Speaker 1: up the shortfall because you can't afford I mean, the
Speaker 1: point is he charted this decline in people's economic security,
Speaker 1: and he links that directly to short termism. Of course,
Speaker 1: so a lot of those decisions are short term decisions there.
Speaker 1: You know, a lot of offshoring comes from the idea that, well,
Speaker 1: we can do this cheaper over there, that you know
Speaker 1: the product won't be as good, will be kind of
Speaker 1: cheating our consumers by giving them a crappy product, will
Speaker 1: be short changing our workers, will be laying off all
Speaker 1: these people. Our stockholders will be happy because the profit
Speaker 1: margin will improve. So yes, these are a result of
Speaker 1: these same short term trade offs, and they lead to
Speaker 1: decisions that have created a situation where the top point
Speaker 1: one percent of our country have seen enormous increases in
Speaker 1: their net worth and their earnings, and most people have
Speaker 1: not seen real increases in their wages in twenty plus years.
Speaker 1: That's not sustainable. I mean, that's why people are so
Speaker 1: upset and angry. I love this quote he told you.
Speaker 1: When we live in a world where we view value
Speaker 1: creation as the end and not as a byproduct, which
Speaker 1: is what short term thinking lends itself to. We end
Speaker 1: up doing great damage to every other constituency, and that's
Speaker 1: what ultimately drives back to the kind of let's rip
Speaker 1: down the establishment and nihilism that, in my view, is
Speaker 1: at the core of trumps m He says, but there
Speaker 1: is that right. It creates this hopelessness and this sense
Speaker 1: that we're not all in it together. I think it's
Speaker 1: very much connected to this rise in populist feeling, not
Speaker 1: just in the US but the world. Another piece I
Speaker 1: worked on the New Yorker dealt with Elliot Management, this
Speaker 1: big Act of its head fund. I wrote about what
Speaker 1: that particular investment in a company called Athena Healthcare, what
Speaker 1: they know Elliot wanted Athena to do, and it was
Speaker 1: all very sort of dramatic. But at one point I
Speaker 1: interviewed Marty Lipton, the chairman of Wachtel Lipton, the big
Speaker 1: law firm, and he has become very interested in this
Speaker 1: issue of short termism, and I think he really sees
Speaker 1: the world in terms of one where a lot of
Speaker 1: people have seen their fortunes decline because of short term decisions.
Speaker 1: In the business world. And he said to me, you
Speaker 1: just cannot have a democracy where most of the population
Speaker 1: is just not seeing any improvement in their situation while
Speaker 1: a tiny sliver is just getting richer and richer, he said,
Speaker 1: is just not sustainable. And it was sort of a
Speaker 1: chilling quote in a way. But I think we can
Speaker 1: already see moves in that direction. And it's scary. It's
Speaker 1: a great irony, isn't it that by engaging in this
Speaker 1: type of behavior, corporations, investors are actually creating the very
Speaker 1: situation that's going to undermine the system that benefits them
Speaker 1: so much, right, And you would think that would I'll
Speaker 1: be able to step back from that and fix it.
Speaker 1: And Shake is trying to so tell us what he's
Speaker 1: doing and is it getting any traction. He really wants
Speaker 1: to kind of bring his message and the lessons that
Speaker 1: can be learned from his experience to policymakers in Washington,
Speaker 1: to other business leaders. He's been doing talks and speeches
Speaker 1: you know, around the world about this, and I think
Speaker 1: people are very intrigued. The great thing about the story
Speaker 1: of panias it is so clear, it is so accessible
Speaker 1: to people. So when you explain short termism and Cherylder
Speaker 1: writes and all this stuff. I mean, most people's eyes
Speaker 1: glaze over, but everyone knows Panera Ron is like this
Speaker 1: very approachable, charismatic guy. Anyone who reads the story can
Speaker 1: just sort of see all the pieces laid out. It's
Speaker 1: such an easy vehicle for communicating this. And certainly after
Speaker 1: the the article came out that I wrote about him,
Speaker 1: a number of you know, like senators and presidential candidates
Speaker 1: did reach out to him. There was some tweeting of
Speaker 1: the piece. So I do think there's a chance that
Speaker 1: some of the policymakers designing economic agendas of some of
Speaker 1: these forthcoming presidential candidates may take this into account, do
Speaker 1: you really? I think so. Certainly on the Democrats, I mean,
Speaker 1: I don't know if they'll do it. Well. You know,
Speaker 1: we've already seen a suggestion from Bernie Sanders and Chuck
Speaker 1: Schumer that we should ban stock buybacks. Now, I think
Speaker 1: a lot of people will perhaps rightfully roll their eyes
Speaker 1: at that, but I think that that whole idea comes
Speaker 1: out of a concern about short termism. I don't know
Speaker 1: if they have someone who really understands the stock market
Speaker 1: giving them advice about how to go about doing this.
Speaker 1: I think it could go very wrong, obviously. What concerns me, though,
Speaker 1: is that we've been talking about this for at least
Speaker 1: as long as you and I have been covering business right,
Speaker 1: and the problem only seems to get worse. It does
Speaker 1: seem to get better despite the good intentions of a
Speaker 1: guy like Ron Shake. Am I being too cynical. I
Speaker 1: think there's a lot of reason for cynicism. I agree
Speaker 1: things have gotten progressively worse. There's barely been a pause
Speaker 1: in the sort of trajectory. I do think Trump's victory
Speaker 1: and what that communicated about the feelings of a lot
Speaker 1: of voters and the economic stresses of a lot of
Speaker 1: people who are sort of previously invisible. I think that
Speaker 1: has been a bit of a wake up call to
Speaker 1: a lot of people. Now. Whether it will be enough
Speaker 1: for whether anything will happen, I just don't know. But
Speaker 1: there is a lot of energy and conversation around this,
Speaker 1: and there wasn't as much before. It's a starting point. Yeah,
Speaker 1: there's a great quote by Shaike that I thought so
Speaker 1: this up. He said, this system doesn't serve the American people.
Speaker 1: There's an opportunity to ask ourselves, is this what we want?
Speaker 1: I think a lot of people are asking the question
Speaker 1: is will those in a position to really make big
Speaker 1: changes while they listen? And a lot of them have
Speaker 1: not been listening, even watching what Trump has done. I
Speaker 1: mean that kind of the contrast between what he promised
Speaker 1: and what he talked about and what I think a
Speaker 1: lot of people responded to in his rhetoric and what
Speaker 1: he's actually done, or what at least he's allowed the
Speaker 1: Republicans in Congress to do. I mean, there's a huge
Speaker 1: gap between those two, and I wonder how many of
Speaker 1: his voters are feeling. If they're feeling let down by him,
Speaker 1: there is a genuine backlash going on. I think it's
Speaker 1: interesting that people are talking about socialism now. I mean
Speaker 1: that's not something that has been going on over the
Speaker 1: previous decades. I mean, people are seriously considering socialism. They're
Speaker 1: so disgusted with the way capitalism has unfolded. So I mean,
Speaker 1: I am also cynical about how much things are going
Speaker 1: to change. I think there's still so much financial interest
Speaker 1: in keeping the system as it is. But there does
Speaker 1: seem to be a very powerful backlash, and maybe it
Speaker 1: will result in some compromise. One can hope Can we
Speaker 1: trust the politicians to solve this? Can we trust CEOs
Speaker 1: to solve this? And if we can't trust politicians and CEOs,
Speaker 1: how does this change? Is it? Guys like Ron Shake,
Speaker 1: I don't think the politicians have done a whole lot
Speaker 1: to earn our trust in this particular area. I'm feeling
Speaker 1: a little frustrated with them, and I think, honestly, in
Speaker 1: a lot of cases, their interests are not aligned with
Speaker 1: their constituents. I mean, this is a huge problem. The
Speaker 1: same can be said for a lot of business leaders.
Speaker 1: I think there are more and more of them like
Speaker 1: Ron Shake, trying to kind of speak up about this,
Speaker 1: But the fact is that most of them are focused
Speaker 1: on the same short term interests that the politicians and
Speaker 1: the investors are focused on, and are making decisions to
Speaker 1: benefit themselves at the expense of their workers, their customers,
Speaker 1: their communities. So no, I don't trust them. I think
Speaker 1: the only way that they're going to change their attitude
Speaker 1: is if people insist that they do. I don't have
Speaker 1: a great prescription as to how to make that happen,
Speaker 1: but there are seeds of it going on because there
Speaker 1: is a sort of backlash against this kind of thinking
Speaker 1: taking place. The fact that people are talking about stock
Speaker 1: buybacks and short termism and socialism and you know, all
Speaker 1: these things that really would have been considered dirty forbidden words.
Speaker 1: I think it's a sign that there is pressure rising
Speaker 1: up that may force some change. Shake had a great
Speaker 1: quote on this point. He said to you, we all
Speaker 1: believe the system is bigger than us and we can't
Speaker 1: fix it. But if we don't take control of that system,
Speaker 1: it's misserving us in powerful ways. And so thought about
Speaker 1: in that light, it's what's the alternative, right, other than
Speaker 1: try to do something. I think it's the only way
Speaker 1: change happens. I've been thinking about the dangers of short
Speaker 1: termism for a very long time. An end Roun's case,
Speaker 1: obsession with short term earnings didn't just cause the bankruptcy
Speaker 1: of the company. It resulted in the loss of a
Speaker 1: lot of great ideas that could have been transformative businesses.
Speaker 1: On the flip side, I remember spending the day with
Speaker 1: Warren Buffett a few years back. He said to me
Speaker 1: that his major goal for his company, Berkshire Hathaway, the
Speaker 1: most important thing for him was that the company was
Speaker 1: around in a hundred years. And the reason why is
Speaker 1: that Berkshire Hathaway is in part an insurance operation, and
Speaker 1: it's made promises to pay people that stretch out a
Speaker 1: hundred years. And for Buffett, the thing that was the
Speaker 1: most critical to him is that the company is there
Speaker 1: to fulfill those promises. In other words, he thinks about
Speaker 1: his company not as a monument to himself, but in
Speaker 1: terms of the impact it has on people's lives. And
Speaker 1: now there's Ron Shake, who told Sheila of this. We've
Speaker 1: ended up in a situation, to the detriment of all
Speaker 1: of us, where our public companies are not able to
Speaker 1: do the things we want in the economy. He continued,
Speaker 1: this system doesn't serve the American people. There's an opportunity
Speaker 1: to ask ourselves is this what we want? And that's
Speaker 1: really the question, isn't it Is this what we want?
Speaker 1: If not, maybe there's a way for us to join
Speaker 1: forces with people like Shake and put pressure on the
Speaker 1: powers that be to change for real this time before
Speaker 1: it's too late. Making a Killing for You is a
Speaker 1: co production of Pushkin Industries and Chalk and Blade. It's
Speaker 1: produced by Ruth Barnes and Rosie Stoffer. My executive producers
Speaker 1: are Alison mcclein no relation in making Casey. The executive
Speaker 1: producer at Pushkin is Mia Loebell. Engineering is by Jason Gambrell.
Speaker 1: Our music is by Jed Flood. Special thanks to Jacob
Speaker 1: Weisberg at Pushkin and everyone on the show. I'm Bethany McLean.
Speaker 1: Thanks so much for listening. Find me on Twitter at
Speaker 1: Bethany mactwelve and let me know who you've enjoyed hearing from.