WEBVTT - Sheelah Kolhatkar on Short Termism 0:00:00.200 --> 0:00:03.600 This is making a killing. I'm Bethany McClean. I hope 0:00:03.600 --> 0:00:06.880 you've enjoyed the series so far. Thanks very much for downloading. 0:00:07.480 --> 0:00:10.160 This show cuts through the hype and noise to reframe 0:00:10.200 --> 0:00:13.280 the stories you thought you understood and uncover the ones 0:00:13.320 --> 0:00:17.919 you didn't know were important, like Alex Gibney talking about thoroughness, 0:00:17.920 --> 0:00:21.400 seth Godin on Amazon and Joe Knows Sarah on Jewel. 0:00:24.079 --> 0:00:27.520 They call it shart termism. It sounds like a disease, 0:00:28.200 --> 0:00:30.400 and actually it is a disease, one that could have 0:00:30.480 --> 0:00:34.440 pretty dire consequences for all of us. In the business world. 0:00:34.600 --> 0:00:38.360 Short termism manifests itself in an intense focus on next 0:00:38.440 --> 0:00:42.440 quarters results, not next year's, and god forbid, not a 0:00:42.479 --> 0:00:47.279 decade from now next quarter. To an alarming degree, as 0:00:47.320 --> 0:00:50.440 we'll be discussing, this pressure leads businesses to engage in 0:00:50.479 --> 0:00:53.360 fraud in order to present Wall Street with the quarterly 0:00:53.400 --> 0:00:57.320 earnings results it wants to see, think and run. But 0:00:57.440 --> 0:01:00.520 that's actually only the tip of the proverbial iceberg. The 0:01:00.600 --> 0:01:03.560 more damaging effects are a little harder to see. The 0:01:03.640 --> 0:01:07.480 way a focus on producing profits now can divert research 0:01:07.480 --> 0:01:10.440 and development dollars that could have invented, say, a life 0:01:10.440 --> 0:01:13.480 saving drug, and done what business is supposed to do 0:01:13.680 --> 0:01:16.680 by making the world a better place. So it was 0:01:16.720 --> 0:01:19.720 a good thing when Warren Buffett, obviously a business icon, 0:01:20.240 --> 0:01:23.680 and Jamie Diamond, the CEO of JP Morgan Chase Wait 0:01:23.800 --> 0:01:25.680 And last spring with an op ed in The Wall 0:01:25.720 --> 0:01:30.560 Street Journal entitled short Termism is Harming the Economy. They 0:01:30.680 --> 0:01:34.640 argued that public companies should reduce or eliminate the practice 0:01:34.680 --> 0:01:38.559 of estimating quarterly earnings because they argued, it often leads 0:01:38.600 --> 0:01:41.800 to an unhealthy focus on short term profits at the 0:01:41.840 --> 0:01:47.640 expense of long term strategy, growth and sustainability. Well yeah, 0:01:47.680 --> 0:01:50.640 but over the years there have been others. In early 0:01:50.640 --> 0:01:54.600 twenty sixteen, Larry Think, the chief executive at Blackrock, the 0:01:54.640 --> 0:01:58.760 world's biggest investor with almost five trillion dollars under management, 0:01:59.160 --> 0:02:01.320 sent a letter to chief executives at S and P, 0:02:01.480 --> 0:02:06.480 five hundred companies and large European corporations. He also urged 0:02:06.640 --> 0:02:10.680 quote resistance to the powerful forces of short termism afflicting 0:02:10.720 --> 0:02:15.080 corporate behavior. That was three years ago, so it's not 0:02:15.160 --> 0:02:19.959 clear what effect, if any, thinks missive is having. Concerned 0:02:20.000 --> 0:02:23.280 voices have been buzzing about this since oh, at least 0:02:23.280 --> 0:02:26.359 the days of Enron, And really none of it seems 0:02:26.400 --> 0:02:29.560 to make a damn bit of difference. So does all 0:02:29.560 --> 0:02:32.800 of this mean that capitalism has a problem? Is this 0:02:32.880 --> 0:02:35.400 part of the reason that a lot of people, particularly 0:02:35.400 --> 0:02:38.960 in the US, the bastion of capitalism, don't seem to 0:02:39.000 --> 0:02:42.600 like or trust business very much anymore? Here to talk 0:02:42.600 --> 0:02:46.080 about this and more is Sheila Kolhatkar. Sheila and I 0:02:46.160 --> 0:02:50.160 first met Jonzaco, and we were drawn to each other because, well, 0:02:50.280 --> 0:02:52.960 we like each other, and because we both worked in 0:02:53.000 --> 0:02:56.359 finance before coming to journalism. She's now a New Yorker 0:02:56.360 --> 0:03:01.239 writer who wrote the best selling book Black Edge, Inside Information, 0:03:01.639 --> 0:03:04.440 Dirty Money, and the Quest to bring Down the Most 0:03:04.480 --> 0:03:08.239 Wanted Man on Wall Street, a man who not incidentally 0:03:08.639 --> 0:03:12.079 made his fortune on short termism. But I swear we're 0:03:12.080 --> 0:03:15.160 going to find some optimism amid the gloom. Okay, I 0:03:15.240 --> 0:03:21.000 promise we're going to try, so, Sheila, before we really 0:03:21.040 --> 0:03:23.760 dive into this, let's talk about why people should care 0:03:23.800 --> 0:03:27.040 about this disease of short termism. I would start off 0:03:27.040 --> 0:03:31.560 by asking someone, have your wages gone up? Has the 0:03:31.639 --> 0:03:34.880 medication your mother needs to treat her dementia? Has that 0:03:34.960 --> 0:03:37.760 become so expensive that you can't afford it. Do you 0:03:37.760 --> 0:03:40.000 know people who've been laid off. Has the big factory 0:03:40.040 --> 0:03:43.160 in the town where you grew up closed? You know? 0:03:43.200 --> 0:03:44.800 Are there a lot more people out of work than 0:03:44.840 --> 0:03:47.360 there used to be. All of those things are connected 0:03:47.400 --> 0:03:52.240 in some way to decisions that companies and policymakers are 0:03:52.320 --> 0:03:56.360 making that are focused much more on short term interests. 0:03:56.600 --> 0:04:00.680 So short termism sounds abstract, but it's actually incredibly real 0:04:00.760 --> 0:04:03.360 in the sense that it's the paycheck in somebody's pocket 0:04:03.440 --> 0:04:07.440 every week. It's the medication they might need to cure 0:04:07.440 --> 0:04:10.600 a chronic disease. What sounds like an abstract concept is 0:04:10.600 --> 0:04:13.560 actually anything, but it's very concrete in terms of the 0:04:13.600 --> 0:04:16.200 impact it has on people's lives. It's really connected to 0:04:16.240 --> 0:04:18.560 almost everything. One of the things I say a lot 0:04:18.680 --> 0:04:21.560 is that business stories are always stories about people, and 0:04:21.680 --> 0:04:24.200 that you've got this great character in the PC road. 0:04:24.240 --> 0:04:26.360 So tell us who is Ron Shake and what made 0:04:26.360 --> 0:04:28.680 you care about him. Ron Shake is the founder of 0:04:28.839 --> 0:04:34.120 Panera Bread, which is this wildly successful fast casual sandwich chain. 0:04:34.400 --> 0:04:37.960 It's one of the most successful restaurant companies in the US. 0:04:38.920 --> 0:04:42.080 Ron will tell you very excitedly and show you charts 0:04:42.120 --> 0:04:45.200 of the Panera stock price and how well it performed. 0:04:46.040 --> 0:04:48.080 I came to be interested in him through this sort 0:04:48.080 --> 0:04:51.200 of roundabout way. I have been doing a lot of 0:04:51.440 --> 0:04:54.280 long form pieces for The New Yorker where I work, 0:04:54.440 --> 0:04:56.920 and one of the themes that comes up a lot 0:04:56.960 --> 0:04:59.640 in them is the way that a lot of businesses 0:04:59.640 --> 0:05:02.760 are being pressured by Wall Street investors to just be 0:05:02.880 --> 0:05:06.080 very focused on short term interests and short term things 0:05:06.080 --> 0:05:08.760 that will cause their stock prices to go up. Absolutely 0:05:08.800 --> 0:05:12.720 the curse of our time, right, yes. And I could see, 0:05:13.160 --> 0:05:15.640 partly because of my obsession with this, partly because I 0:05:15.640 --> 0:05:18.479 have a financial background, that there's a connection between the 0:05:18.520 --> 0:05:21.320 fact that this is happening and all this other chaos 0:05:21.360 --> 0:05:25.479 we're seeing in our political and economic world, and the 0:05:25.560 --> 0:05:31.200 Trump presidency, the political polarization, all these debates about rural 0:05:31.279 --> 0:05:34.000 voters in the Midwest and why they were drawn to 0:05:34.520 --> 0:05:37.799 President Trump's message. There's a connection between these two things. 0:05:37.839 --> 0:05:40.599 And I was struggling to find a way to illustrate 0:05:40.720 --> 0:05:45.039 that connection, and along came Ron Shake, who is a 0:05:45.120 --> 0:05:49.560 very interesting, successful, compelling guy, but who also sort of 0:05:49.560 --> 0:05:53.919 embodies this connection and the tension between long and short 0:05:54.000 --> 0:05:57.799 term interests, and I had the good fortune of sitting 0:05:57.800 --> 0:05:59.360 down to talk to him. It's one of the things 0:05:59.360 --> 0:06:02.480 that drew media your pieces this larger picture behind it, right, 0:06:02.520 --> 0:06:04.880 that Shart Tramism in business is not just a business 0:06:04.880 --> 0:06:08.359 world issue. It's actually has all these bigger ramifications. But 0:06:08.560 --> 0:06:11.039 we'll get to that. Going back to Ron, what made 0:06:11.040 --> 0:06:13.520 Panera so successful. The interesting thing about Ron is that 0:06:13.560 --> 0:06:18.560 he has a real knack for recognizing gaps in the market, 0:06:18.760 --> 0:06:23.239 particularly in the food restaurant world. And he started Panera 0:06:23.400 --> 0:06:26.760 in the well he started the company that became Panera 0:06:26.800 --> 0:06:29.960 in the early eighties. He began with a simple cookie 0:06:29.960 --> 0:06:34.200 shop in Boston, and very quickly he recognized that there 0:06:34.200 --> 0:06:37.839 were a lot of office workers in Boston who didn't 0:06:37.839 --> 0:06:39.760 have anywhere to eat lunch that you know. Their options 0:06:39.760 --> 0:06:42.839 were McDonald's are sort of a more formal, old fashioned 0:06:42.880 --> 0:06:45.520 sit down restaurant, and he could see that people were 0:06:45.560 --> 0:06:48.720 becoming a little more health conscious. So through a series 0:06:48.760 --> 0:06:52.560 of kind of mergers and he took over Obopa. He 0:06:52.680 --> 0:06:58.479 started serving soups, salad, sandwiches to this like busy but 0:06:58.640 --> 0:07:03.360 health conscious cohort of office workers. So he saw an 0:07:03.360 --> 0:07:05.919 opening to provide people with a different type of food 0:07:05.960 --> 0:07:08.679 than they'd had previously. But he also did other things 0:07:08.680 --> 0:07:10.880 that were different that you detail in your story. What 0:07:10.960 --> 0:07:13.520 were some of those things that were really innovative from 0:07:13.520 --> 0:07:15.120 a business point of view. One of the things he 0:07:15.160 --> 0:07:16.960 talks about a lot is that he really wanted to 0:07:17.000 --> 0:07:21.600 make his restaurants welcoming. He wanted to make them into 0:07:21.600 --> 0:07:24.560 places where you might hang out or have a meeting. 0:07:24.600 --> 0:07:26.080 You would say, oh, you could have a business meeting, 0:07:26.080 --> 0:07:28.840 a job interview, a church meeting, sort of the way 0:07:28.880 --> 0:07:31.040 Starbucks did around the same time, and even Barnes and 0:07:31.120 --> 0:07:33.760 Noble when it was really up and coming, you know, 0:07:34.000 --> 0:07:37.520 having couches and comfortable seating. And he also started one 0:07:37.560 --> 0:07:40.720 of the first restaurant loyalty programs where you could like 0:07:40.760 --> 0:07:44.040 earn points and rewards for eating there. He also sort 0:07:44.040 --> 0:07:47.440 of later in the company's evolution, introduced different ways of ordering. 0:07:47.480 --> 0:07:49.080 You know, you could order on your phone, you could 0:07:49.160 --> 0:07:52.760 order online, you could call so multi platform, multi channel 0:07:52.920 --> 0:07:55.840 ways of stuff that seems obvious now but wasn't at 0:07:55.880 --> 0:07:58.040 all when he did it. Right, there's this point I 0:07:58.040 --> 0:08:00.440 wanted to pause on this quote in your piece I Love, 0:08:00.520 --> 0:08:03.000 which is from him, but he says they wanted food 0:08:03.000 --> 0:08:05.880 they felt good about. They wanted environments that engage them, 0:08:05.920 --> 0:08:09.240 they wanted people that cared. Shake said basically they wanted 0:08:09.240 --> 0:08:12.160 to feel respected by their food. And what fast food 0:08:12.160 --> 0:08:15.360 had become was a commodity. It had become nutritional cocaine. 0:08:15.840 --> 0:08:18.040 And I thought, is there a parallel here between what 0:08:18.080 --> 0:08:20.240 people want in food and what they want in capitalism 0:08:20.360 --> 0:08:23.720 and short termism in a sense financial cocaine. Well, that's 0:08:23.760 --> 0:08:27.080 what's great about the story, because yes, it's it's like 0:08:27.120 --> 0:08:30.440 a little microcosm of the larger issues we're dealing with, 0:08:30.480 --> 0:08:34.960 which is there was this huge upsurge in cheap, easy, 0:08:35.520 --> 0:08:40.720 ultimately damaging food, drink, even the coffee at that time 0:08:40.880 --> 0:08:43.520 was just this very mass market. You know, he mentioned 0:08:43.520 --> 0:08:46.359 Maxwell House at one point. I mean, the whole consumer 0:08:46.800 --> 0:08:50.280 brand market was dominated by these huge companies Coke, Pepsi, 0:08:50.400 --> 0:08:55.080 Maxwell House that were creating products that were ultimately sort 0:08:55.120 --> 0:08:59.640 of garbage, inexpensive, you could grab and go. And yes, 0:08:59.720 --> 0:09:02.440 that is something we've obviously been accustomed to in the 0:09:02.559 --> 0:09:05.040 larger economy and sort of the source of many of 0:09:05.080 --> 0:09:08.200 our deeper problems. I do kind of look at almost 0:09:08.240 --> 0:09:12.360 all major news events as ultimately financial stories, if you 0:09:12.400 --> 0:09:15.520 peel back the threads, if you really dig into almost anything, 0:09:16.040 --> 0:09:19.920 there is a financial agree I think there's a huge 0:09:19.920 --> 0:09:22.120 advantage in looking at the world that way because you 0:09:22.120 --> 0:09:24.520 see through a lot of stuff that people who aren't 0:09:24.520 --> 0:09:29.360 looking for that might miss. And therefore, when you see 0:09:29.440 --> 0:09:32.840 someone like President Trump gathering up all sorts of votes 0:09:33.360 --> 0:09:36.120 from out of work factory workers in states that are 0:09:36.160 --> 0:09:40.240 experiencing like economic depression, you know, all the dots are connected. 0:09:40.280 --> 0:09:44.000 For me, I can very easily see how changes and 0:09:44.080 --> 0:09:49.320 trends in finance, you know, the rise of private equity, offshoring, 0:09:49.400 --> 0:09:53.960 all these things ultimately trickle down into these real world effects, 0:09:54.360 --> 0:09:56.000 doesn't it. In no way when you look back on 0:09:56.080 --> 0:09:59.319 your early experience and finance back in the round two thousand, 0:09:59.400 --> 0:10:02.000 doesn't seem like a more naive time in a sense, 0:10:02.120 --> 0:10:04.720 and that we were perhaps more willing to believe some 0:10:04.800 --> 0:10:07.520 of the cynicism that it afflets us now hadn't really 0:10:07.600 --> 0:10:10.679 said in yet, And the short termism that is so 0:10:10.760 --> 0:10:13.840 pervasive seemed like a temporary blip or something that was 0:10:13.880 --> 0:10:16.800 fixable or is that just me? I absolutely look back 0:10:17.320 --> 0:10:20.480 on even you know, even ten years ago, things seemed 0:10:20.480 --> 0:10:23.400 a little quaint sometimes to me in light of what's 0:10:23.400 --> 0:10:26.320 going on now. I mean, what's happened really is just 0:10:26.440 --> 0:10:30.640 a lot of the facade that used to be covering 0:10:30.679 --> 0:10:35.079 over everything has been removed. I think the financial crisis 0:10:35.080 --> 0:10:37.000 was the beginning of that that really pulled the shades 0:10:37.040 --> 0:10:38.720 off of everyone's eyes. I mean that was really a 0:10:38.760 --> 0:10:41.079 period when a lot of people became kind of radicalized 0:10:41.080 --> 0:10:44.080 in their views and their cynicism about Wall Street. Right 0:10:44.280 --> 0:10:46.800 shocking that you could look at these big companies with 0:10:46.960 --> 0:10:50.040 their tens of thousands of employees and their billions of 0:10:50.040 --> 0:10:53.360 dollars in market cap and there gleaming skyscrapers in New 0:10:53.440 --> 0:10:55.560 York and they could be so fragile. And then you 0:10:55.640 --> 0:10:59.120 have antidotes to those stories like Iran shake who built 0:10:59.160 --> 0:11:02.080 something real right and he got rewarded for it. Didn't 0:11:02.120 --> 0:11:04.560 he did, He did, He did well personally, He made 0:11:04.559 --> 0:11:06.840 a killing in the best of ways, in the sense 0:11:06.840 --> 0:11:09.160 that he created a successful business and got paid for 0:11:09.200 --> 0:11:12.240 having done so. Absolutely. I mean he became very wealthy 0:11:12.400 --> 0:11:16.240 personally as a result of exactly what we want people 0:11:16.280 --> 0:11:18.719 to do in our economy, which is he had an idea, 0:11:18.920 --> 0:11:22.720 He risked his capital and his time, he invested, he 0:11:22.760 --> 0:11:27.160 built his company, he innovated, he created jobs. You know, 0:11:27.240 --> 0:11:30.840 he helped move the food industry into a healthier direction. 0:11:31.320 --> 0:11:33.440 And yes, he did very well as a result, and 0:11:33.520 --> 0:11:36.480 that's exactly what business should be about. Right. Does he 0:11:36.559 --> 0:11:38.439 think he could do it today? No, I mean, this 0:11:39.080 --> 0:11:41.120 was one of the reasons he was so interesting to 0:11:41.160 --> 0:11:44.600 talk to because he feels very strongly that it would 0:11:44.600 --> 0:11:50.000 be difficult, if not almost impossible, to do now what 0:11:50.040 --> 0:11:52.800 he did then as a result of a whole bunch 0:11:52.840 --> 0:11:56.080 of factors. But this rise in short term pressures is 0:11:56.080 --> 0:11:58.240 sort of the number one culprit he would point to. 0:11:58.400 --> 0:12:00.360 Did he feel like he had to push back on 0:12:00.440 --> 0:12:03.600 that even while he was building his company, He absolutely did, 0:12:03.640 --> 0:12:08.080 I mean he In twenty seventeen, Ron decided to take 0:12:08.320 --> 0:12:12.400 Panera private, and he ended up joining forces with a 0:12:12.440 --> 0:12:15.319 private equity firm that he felt had sort of longer 0:12:15.400 --> 0:12:18.320 term goals for the company, because he felt that being 0:12:19.120 --> 0:12:21.920 publicly traded company and being subject to the whims of 0:12:21.960 --> 0:12:26.080 the stock market in the current environment was undermining the 0:12:26.320 --> 0:12:30.200 company's ability to grow and innovate and really made it 0:12:30.240 --> 0:12:33.800 almost impossible to run and build a successful business. So 0:12:33.880 --> 0:12:36.080 he seemed to believe. It was one note that actually 0:12:36.120 --> 0:12:39.360 made me a little skeptical that he seemed to believe 0:12:39.400 --> 0:12:42.439 that private equity was part of the solution. Does he 0:12:42.559 --> 0:12:44.880 actually believe that? And do you believe that because I 0:12:44.920 --> 0:12:47.000 tend to think of private equity as part of the problem. 0:12:47.160 --> 0:12:50.560 That's a fair question. I think, like activist hedge funds, 0:12:50.920 --> 0:12:55.160 private equity firms come in all different stripes, and there 0:12:55.280 --> 0:12:57.760 is one version of private equity investing that serves a 0:12:57.800 --> 0:13:00.840 valuable purpose in the market. I mean, in theory, private 0:13:00.840 --> 0:13:05.720 equity investors are looking for troubled businesses, businesses that could 0:13:05.840 --> 0:13:09.160 use a little capital investment, maybe some new strategy, the 0:13:09.240 --> 0:13:10.920 ideas that they're going to go in there, they're going 0:13:10.960 --> 0:13:13.400 to make investments, they're going to change management, and then 0:13:14.200 --> 0:13:17.120 ultimately leave the company in a stronger position. I mean, 0:13:17.160 --> 0:13:20.199 that's the theory, and that is of course, occasionally, or 0:13:20.240 --> 0:13:22.880 perhaps sometime in the past, it often worked like that, 0:13:22.920 --> 0:13:26.040 where you would have an investor who would be incentivized 0:13:26.080 --> 0:13:28.520 to try and help fix or improve a company. And 0:13:28.559 --> 0:13:31.080 of course there are even examples of companies that are 0:13:31.120 --> 0:13:34.720 really doing things wrong where activist investors might call that 0:13:34.800 --> 0:13:37.960 out and point out severe problems that slogan of private 0:13:37.960 --> 0:13:41.000 equities that it allows businesses to focus on the long term. 0:13:41.360 --> 0:13:44.200 It's become a marketing slogan that I worry is devoid 0:13:44.240 --> 0:13:46.680 of substance in many cases, because I think the private 0:13:46.679 --> 0:13:49.840 equity owners put as much pressure on the business to 0:13:49.880 --> 0:13:52.400 generate profits as the public markets do so that they 0:13:52.400 --> 0:13:54.800 too can turn around, flip it, take it public again, 0:13:55.000 --> 0:13:58.400 and get their money out. Because that short term pressure 0:13:58.440 --> 0:14:02.280 has become relentless investors as well. Right, Yes, and I 0:14:02.280 --> 0:14:05.160 think many of those private equity deals are structured so 0:14:05.200 --> 0:14:09.080 that the investors make money even before they flip the company. 0:14:09.080 --> 0:14:11.760 I mean they're paying themselves dividends. They're making the company 0:14:11.800 --> 0:14:14.600 borrow money to pay the private equity firm fees for 0:14:14.679 --> 0:14:17.839 managing the company. You know, they forced the companies to 0:14:17.880 --> 0:14:20.760 sell all their real estate and unlease it back. They 0:14:20.800 --> 0:14:23.120 weaken the companies so then when there's a real hiccup 0:14:23.960 --> 0:14:28.320 in the business environment, there is no cushion there to 0:14:28.400 --> 0:14:31.040 help the company weather that. That practice that you just 0:14:31.160 --> 0:14:34.920 mentioned of private equity firms taking dividends by loading a 0:14:34.920 --> 0:14:36.840 company up with debt and figuring out a way to 0:14:36.880 --> 0:14:41.240 pay themselves, in effect, before they've done anything to earn 0:14:41.280 --> 0:14:44.840 that payday to me, is just a complete betrayal of 0:14:44.840 --> 0:14:47.720 what private equity is supposed to be about. Yes, agreed, 0:14:47.760 --> 0:14:49.960 I mean the incentives are very messed up, And I 0:14:49.960 --> 0:14:52.600 wrote about toys ARUs recently that's a very good example. 0:14:52.640 --> 0:14:54.880 I mean, there are obviously a whole bunch of challenges 0:14:54.920 --> 0:14:57.440 facing a company like toys Rus and Amazon is a 0:14:57.480 --> 0:14:59.800 huge one, But when you really look at the details 0:14:59.840 --> 0:15:02.560 of what the private equity investors did and only sears 0:15:02.640 --> 0:15:04.560 is a bit of a similar story. I mean, the 0:15:04.680 --> 0:15:07.359 argument is that their interests are supposed to be aligned 0:15:07.480 --> 0:15:09.920 with those of the company and of the longer term 0:15:10.160 --> 0:15:12.920 stakeholders in that company. But what they've managed to do 0:15:13.040 --> 0:15:15.680 is figure out a way to make their money no 0:15:15.720 --> 0:15:18.880 matter what. So they're not really aligned. They're not really 0:15:18.880 --> 0:15:22.800 taking a big risk that creates all sorts of inverted 0:15:23.120 --> 0:15:26.720 perverse incentives and leads to all these companies that could 0:15:26.720 --> 0:15:30.440 have probably been saved just being sent into bankruptcy. So 0:15:30.680 --> 0:15:32.760 I want to pause on this notion of incentives and 0:15:32.840 --> 0:15:35.880 compensation because I often feel like the quest for the 0:15:35.960 --> 0:15:38.320 right compensation system it tends to be the law of 0:15:38.360 --> 0:15:42.040 unintended consequences. Right everybody comes up with a compensation structure 0:15:42.080 --> 0:15:44.240 that they think is brilliant, I mean stock options, What 0:15:44.280 --> 0:15:47.400 could be better, right, aligning and executive's interest with the 0:15:47.440 --> 0:15:50.440 head of shareholders. And then, of course executives figured out 0:15:50.480 --> 0:15:52.920 ways to basically game the system such that they could 0:15:52.960 --> 0:15:55.520 get paid in the short term whether or not their 0:15:55.520 --> 0:15:58.600 companies did well. The best example is Actually and Run, 0:15:58.800 --> 0:16:01.640 where the top two hundred executives I'm going to be 0:16:01.680 --> 0:16:04.720 directionally right about this number, got over a billion dollars 0:16:04.760 --> 0:16:07.920 in stock option compensation in two thousand, which was Enron's 0:16:08.040 --> 0:16:11.080 last full year of existence before it went bankrupt. I mean, 0:16:11.120 --> 0:16:15.440 if you need a fact to show how absurdly unaligned, right, 0:16:15.480 --> 0:16:18.800 stock option compensation can be. There's this great stat from 0:16:18.880 --> 0:16:22.400 the IMF, the International Monetary Fund, and they say, pension funds, 0:16:22.440 --> 0:16:26.400 insurance companies, mutual fund, sovereign wealth funds hold over one 0:16:26.440 --> 0:16:29.680 hundred trillion dollars in assets and they're managing money on 0:16:29.800 --> 0:16:32.160 behalf of all of us, right, And so you'd think 0:16:32.200 --> 0:16:35.240 that haven't obvious interest in long term value creation, right, 0:16:35.480 --> 0:16:38.440 because that's what we all want, is long term value creation. 0:16:38.760 --> 0:16:42.360 And yet all these players are encouraging short termism. Too, 0:16:42.640 --> 0:16:45.240 Why what's gone wrong there? Why can't we align capital 0:16:45.280 --> 0:16:48.040 with capitalism. This came up a lot around some of 0:16:48.080 --> 0:16:51.480 these high profile bankruptcies we've seen recently that involved private 0:16:51.480 --> 0:16:54.280 equity investors, because I think in the case of Choice 0:16:54.320 --> 0:16:56.440 r US, where many of those workers just got very 0:16:56.520 --> 0:16:59.240 badly burned or you know, we're owed money or didn't 0:16:59.240 --> 0:17:03.040 get severancy expected, a lot of pension fund investors were 0:17:03.080 --> 0:17:04.639 sort of like, hey, wait a second, like why are 0:17:04.680 --> 0:17:06.800 we putting money with these private equity firms when they're 0:17:06.840 --> 0:17:09.840 then going out and dumping our members pensions onto the 0:17:09.920 --> 0:17:12.520 fire the second that you know, things get tough at 0:17:12.520 --> 0:17:14.560 the company. It doesn't do you a whole lot of 0:17:14.600 --> 0:17:17.720 good if your pension fund is making money, but the 0:17:17.760 --> 0:17:20.239 way it's making money is costing you your employment, right, 0:17:20.280 --> 0:17:23.479 and something very twisted about that tell us about Shake's 0:17:23.520 --> 0:17:26.400 battles with activist investors. He had to fight them off too, 0:17:26.440 --> 0:17:29.160 didn't he. Even with everything he'd done, he still had 0:17:29.160 --> 0:17:33.159 to defend off attempts to change his strategy. Well, that 0:17:33.280 --> 0:17:35.520 was it he I don't think he had one of 0:17:35.560 --> 0:17:40.080 the most drawn out, brutal activist investor fights of all time, 0:17:40.320 --> 0:17:42.960 but it was notable he had a couple of different 0:17:42.960 --> 0:17:45.840 activists take positions in his stock. He told me that 0:17:45.920 --> 0:17:49.080 often the things they wanted him to do, he felt 0:17:49.200 --> 0:17:52.240 were kind of undermining of the longer term goals and 0:17:52.240 --> 0:17:54.000 interests of the company. And one of the things that 0:17:54.040 --> 0:17:56.399 they wanted him to do is raise prices. You know, 0:17:56.520 --> 0:17:58.880 I'm sure someone an analyst at one of those funds 0:17:59.000 --> 0:18:01.119 kind of crunched the number of Panera and said, you 0:18:01.160 --> 0:18:03.080 know what, you could get these people to pay like 0:18:03.359 --> 0:18:06.840 x percentage more for these sandwiches. You should charge more. 0:18:06.960 --> 0:18:09.920 But he had very strong feelings about customer loyalty, and 0:18:10.000 --> 0:18:13.359 he wanted people to have a really positive feeling about 0:18:13.359 --> 0:18:16.080 their experience at Panera and to want to come back. 0:18:16.400 --> 0:18:18.560 And he thought, you know, that might kind of juice 0:18:18.640 --> 0:18:21.880 up earnings in the near term, but over time, we're 0:18:21.920 --> 0:18:24.040 going to lose customers. You know, we're not going to 0:18:24.119 --> 0:18:26.240 have the same loyalty that we used to. Someone else 0:18:26.280 --> 0:18:28.679 could come into the market with a cheaper product and 0:18:28.760 --> 0:18:31.399 draw them away. So he resisted that he felt he 0:18:31.440 --> 0:18:34.280 had some position of strength when dealing with these activists 0:18:34.280 --> 0:18:38.400 because the company had been so successful, But even still, 0:18:38.680 --> 0:18:43.680 he eventually decided that he couldn't risk having his decision 0:18:43.720 --> 0:18:45.680 making undermined, and he made it. He told me a 0:18:45.720 --> 0:18:48.840 story about how they'll often send in an analyst, you know, 0:18:48.920 --> 0:18:54.480 some business school graduate decades younger than the company founder 0:18:54.600 --> 0:18:58.240 or the CEO, and this analyst will say, well, you know, sir, 0:18:58.400 --> 0:19:01.200 I think you could think you could try just raising 0:19:01.200 --> 0:19:04.600 the prices a little bit. I've got this spreadsheet. Ron 0:19:04.720 --> 0:19:07.040 was just seemed a little insulted by that. Frankly, I 0:19:07.080 --> 0:19:09.800 can imagine what's interesting. It makes me think back because 0:19:09.800 --> 0:19:11.960 I remember someone saying to me years ago that one 0:19:12.000 --> 0:19:13.960 of the signs of a business that was going to 0:19:14.000 --> 0:19:16.560 face trouble was one that didn't leave a nickel on 0:19:16.600 --> 0:19:19.240 the table. I didn't really know what that meant at 0:19:19.240 --> 0:19:22.479 the time, but I think when you do extract every 0:19:22.480 --> 0:19:26.040 possible bit of earnings from your customers, from your from 0:19:26.080 --> 0:19:29.680 your suppliers, in the end, if you don't leave crumbs 0:19:29.680 --> 0:19:32.639 for other other people, if you are taking every single nickel, 0:19:32.840 --> 0:19:35.439 it's a form of short termism, and it's a form 0:19:35.680 --> 0:19:39.800 of disrespect for the ecosystem in which you exist. Right absolutely, 0:19:40.119 --> 0:19:42.560 I think the whole thing is steeped in a sort 0:19:42.600 --> 0:19:45.840 of contempt for the other the other parts, the other 0:19:46.040 --> 0:19:48.719 the event, that's a great phrase, the other the other 0:19:48.960 --> 0:19:52.200 entities who have interests in the company. Um, it's also 0:19:52.400 --> 0:19:55.320 undermining of your own interests because, um, you know, the 0:19:55.400 --> 0:19:57.520 moment there's a bump in the road, that company will 0:19:57.600 --> 0:20:01.320 not have any any ends, any friends, any gas in 0:20:01.359 --> 0:20:05.920 the tank, like pick your cliche metaphor to whether that challenge, 0:20:05.960 --> 0:20:07.439 you know, and then they have to go into the 0:20:07.480 --> 0:20:10.439 spiral or even more cost cutting and yep, leaving the 0:20:10.520 --> 0:20:13.360 nickel on the on the table creates give them the system. Yes, 0:20:13.720 --> 0:20:16.680 if you had to vote activist investors thumbs up, thumbs down. 0:20:17.119 --> 0:20:19.399 I've been asked this before. You know, would you just 0:20:19.480 --> 0:20:22.600 ban hedge funds if you could? No, I mean I 0:20:22.640 --> 0:20:26.760 wouldn't ban all activist investors. However, I do think we 0:20:26.840 --> 0:20:32.600 need to rethink tax policy, regulatory policy. We need to 0:20:32.640 --> 0:20:38.600 find ways to perhaps make it less financially attractive to 0:20:38.760 --> 0:20:44.200 do this short term trading and more attractive create greater 0:20:44.280 --> 0:20:48.200 incentives for longer term investment. In a really interesting way, 0:20:48.240 --> 0:20:50.760 I think your current focus in your current work connects 0:20:50.760 --> 0:20:54.000 to your wonderful book Black Edge, because in some ways, 0:20:54.119 --> 0:20:56.480 the Steve Cohen's story is the story a very short 0:20:56.600 --> 0:21:00.520 term capital Right, would you argue that his worldview, that 0:21:00.560 --> 0:21:03.600 short term worldview has done damage to capitalism above and 0:21:03.720 --> 0:21:07.760 beyond the damage of just the Steve Cohen's story. Well, 0:21:07.800 --> 0:21:11.040 he's part of a system. He's part of a group, 0:21:11.520 --> 0:21:16.000 very large and influential group of mostly hedge fund investors 0:21:16.480 --> 0:21:20.239 who are interested in, yes, short term trading, I mean 0:21:20.320 --> 0:21:25.160 essentially gambling informed gambling, you might say. And I don't 0:21:25.200 --> 0:21:27.480 want to put all of the ills of our economy 0:21:27.520 --> 0:21:29.919 at Steve Cohen's feet, of course, but the fact is 0:21:29.960 --> 0:21:33.080 that this type of investing that he represents has absolutely 0:21:33.720 --> 0:21:37.480 contributed to this pressure. And one of the moments I 0:21:37.480 --> 0:21:39.399 wrote about in the book that really stood out to 0:21:39.440 --> 0:21:42.960 me was the sort of key trade that occurred that 0:21:43.080 --> 0:21:45.800