WEBVTT - Hard Lessons in Corporate Governance

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news.

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<v Speaker 2>This is Bloomberg Business Wait inside from the reporters and

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<v Speaker 2>editors who bring you America's most trusted business magazine, plus

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<v Speaker 2>global business, finance and tech news. The Bloomberg Business Week

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<v Speaker 2>Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.

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<v Speaker 3>Well, the market in the software then expected. Peril's report

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<v Speaker 3>certainly a top story today. So this other one got

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<v Speaker 3>a little lost in the shuffle. JP Morgan, Chase CEO

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<v Speaker 3>talking about this one, this was you know, you wake

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<v Speaker 3>up this morning before and I mean this is when

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<v Speaker 3>I woke up and this was like a headline this morning.

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<v Speaker 1>Got through it.

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<v Speaker 3>JP Morgan Chase CEO. Jamie Diamond said the next US

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<v Speaker 3>president must work to bring together a quote deeply divided

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<v Speaker 3>nation as domestic and geopolitical issues mount, and said the

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<v Speaker 3>business world should have representation in the cabin Here's what

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<v Speaker 3>he wrote. The private sector has huge wells of expertise

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<v Speaker 3>and produces eighty five percent of our nation's jobs. This

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<v Speaker 3>was in an opinion piece published early this morning in

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<v Speaker 3>The Washington Post. It should have a seat at the table.

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<v Speaker 3>Yet in recent years, government leaders have often failed to

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<v Speaker 3>engage those in industry. A president should put the most

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<v Speaker 3>talented people, including those from business and the opposite party,

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<v Speaker 3>into their cabinet.

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<v Speaker 1>So a quote seat at the table Jamie Diamond is

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<v Speaker 1>talking about is representation, having those who are in the

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<v Speaker 1>private sector helping to share policy, giving those in business

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<v Speaker 1>a say in government. At its core, this is really governance.

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<v Speaker 3>It's an important concept not just in politics, but also

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<v Speaker 3>in business, and that's corporate governance. Bryce Tingle is an

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<v Speaker 3>expert in it. He's a business law professor at the

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<v Speaker 3>University of Calgary and he's got a new book out.

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<v Speaker 3>It's called Hard Lessons in Corporate Governments. Professor, good to

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<v Speaker 3>have you with us this afternoon. How are you good?

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<v Speaker 4>Thanks, thank you very much, Cale and Till. I'm delighted

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<v Speaker 4>to be here.

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<v Speaker 3>So I just want to start with the failure of

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<v Speaker 3>corporate governance here in the US. Where do you see

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<v Speaker 3>examples of it failing?

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<v Speaker 4>It fails in two different ways. One is, for the

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<v Speaker 4>last thirty years, we've really changed the way companies are governed,

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<v Speaker 4>and as I detail length in the book, we've studied

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<v Speaker 4>the outcomes and they either don't the changes we made

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<v Speaker 4>either don't make any difference the way corporations work, or

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<v Speaker 4>they make things a little worse. And you can see that.

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<v Speaker 4>You know, we really started experimenting with corporate governance in

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<v Speaker 4>the early nineties, and you can see that in things

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<v Speaker 4>like dot com collapse and some of the bad behavior

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<v Speaker 4>that led to the two thousand and eight financial crisis,

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<v Speaker 4>and stock option back dating and executive pay. So even

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<v Speaker 4>if you're not really familiar with the empirical literature, at

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<v Speaker 4>this point, it's becoming pretty obvious that what we were

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<v Speaker 4>doing isn't working. But the second way that our governance

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<v Speaker 4>fails is we've made it really unpleasant to be a

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<v Speaker 4>company that subject to our corporate governance rules. And those

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<v Speaker 4>rules live in the public mark markets, and so we

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<v Speaker 4>have seen over the last twenty some odd years of

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<v Speaker 4>growing reluctant as part of American businesses to join the

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<v Speaker 4>public markets.

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<v Speaker 1>So, you know, going into it's funny, I was thinking

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<v Speaker 1>about we talk about public markets versus private and I

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<v Speaker 1>do wonder about how that plays into it, because you know,

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<v Speaker 1>when you've got folks like US governing companies on a

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<v Speaker 1>quarterly basis, there are certain metrics that we measure them by, right,

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<v Speaker 1>and certainly investors do, and I do wonder how that

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<v Speaker 1>kind of gets in the way of maybe doing better

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<v Speaker 1>when it comes to corporate governance. So have public markets

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<v Speaker 1>failed us?

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<v Speaker 4>I think public markets are failing us. I don't think

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<v Speaker 4>i'd use the past tense. They're failing us because we

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<v Speaker 4>all depend on new innovative businesses coming to the public

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<v Speaker 4>markets and making themselves available for the average investor to

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<v Speaker 4>invest in, and exposing their business in the way that

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<v Speaker 4>your show permits. You get a lot more transparency in

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<v Speaker 4>the public markets. And so if the public markets aren't

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<v Speaker 4>doing the job of attracting new businesses into them, they're

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<v Speaker 4>beginning to fail. They're about half the size they were

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<v Speaker 4>twenty some odd years ago.

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<v Speaker 3>Let's talk compensation and executive compensation here, because let's be honest,

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<v Speaker 3>I think many people would argue it's gotten a little

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<v Speaker 3>out of hand in terms of pay packages.

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<v Speaker 1>If you have a chapter devoted to this.

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<v Speaker 3>For executives of US companies, what is the relationship between

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<v Speaker 3>governance and executive compensation?

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<v Speaker 4>That's an excellent question. In some ways, compensation is what

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<v Speaker 4>got us started in making all the changes we have

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<v Speaker 4>over the last thirty years. The notion behind modern governance

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<v Speaker 4>is that we're trying to control the behavior of managers.

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<v Speaker 4>They're in a situation where they have custody of the

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<v Speaker 4>shareholder's property, that is, the assets of the business, and

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<v Speaker 4>we want to prevent them from misusing them or dealing

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<v Speaker 4>with them in a self interested way, and the most

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<v Speaker 4>obvious way for them to do that is obviously with

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<v Speaker 4>executive compensation, paying themselves too much, and so right from

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<v Speaker 4>the early day of the modern corporate governance regime in

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<v Speaker 4>the early nineties, we saw sustained efforts on the parts

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<v Speaker 4>of multiple parties, including US Congress, to a control executive pay.

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<v Speaker 4>And I think at this point we can all say

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<v Speaker 4>that everything we've done is a failure.

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<v Speaker 3>The salaries might have been reduced or have stayed stable,

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<v Speaker 3>but total compensation has gone through the roof.

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<v Speaker 4>Yeah, it now takes more than twice as much of

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<v Speaker 4>the profits of a company to pay its most senior

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<v Speaker 4>executives than it did back in nineteen ninety two. So yeah,

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<v Speaker 4>it has been a failure. The thing I point out

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<v Speaker 4>in my book is that the very things that we

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<v Speaker 4>tried as part of our corporate governance reforms actually were

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<v Speaker 4>the one things that led to this huge increase in

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<v Speaker 4>executive pay. The truth is executive pay had stayed pretty

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<v Speaker 4>flat from the end of the Second World War into

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<v Speaker 4>the late nineteen seventies, and then it rose only very

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<v Speaker 4>slightly in the nineteen eighties. The time when we start

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<v Speaker 4>experimenting with the corporate governance inly nineties is when executive

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<v Speaker 4>pay just explodes.

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<v Speaker 1>You know, we were thinking about a couple of companies,

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<v Speaker 1>to be quite honest with you, when Tim and I

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<v Speaker 1>were prepping for this price and like Tesla, good corporate governance, boeing,

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<v Speaker 1>good corporate government.

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<v Speaker 3>Are you laughing? He's laughing.

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<v Speaker 1>Good corporate governance, which we've all been talking about, kind

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<v Speaker 1>of a real life succession drama playing out.

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<v Speaker 4>Yeah, well, let's stay. Let's stay Tesla because Elon Musk

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<v Speaker 4>is always the most entertaining. So you can have a

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<v Speaker 4>couple of views about that Tesla pay package. I mean,

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<v Speaker 4>of course, it seems like it's absurdly too big, But

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<v Speaker 4>the fifty eight billion dollars maybe fifty two billion dollars

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<v Speaker 4>if you parse the numbers carefully. The the Delaware court

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<v Speaker 4>threw it out. And what's interesting is the total irrelevance

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<v Speaker 4>of the reason the Delaware court threw it out. So

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<v Speaker 4>the Delaware court threw it out because it said Elon

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<v Speaker 4>Musk has got too much power, and the independent directors

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<v Speaker 4>on the board of Tesla weren't really independent and they

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<v Speaker 4>didn't disclose to the shareholders at the time the shareholders

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<v Speaker 4>voted back in twenty eighteen that they weren't as independent

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<v Speaker 4>as maybe the shareholders. That, in a nutshell, is what

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<v Speaker 4>the ort held. That strikes lots of people, including the

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<v Speaker 4>shareholders who voted again to award Elon his pay package

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<v Speaker 4>just a month ago. Strikes a lot of observers. Is

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<v Speaker 4>dumb and kind of irrelevant. It was clear in twenty

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<v Speaker 4>eighteen that Elon Musk was the driving force behind Tesla,

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<v Speaker 4>and the size of his pay package, the terms on

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<v Speaker 4>which it was made available to him was well reported

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<v Speaker 4>by the financial press. It was fairly and accurately disclosed,

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<v Speaker 4>and the materials that were sent to the shareholders. It

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<v Speaker 4>would have been no trouble for the shareholders to evaluate

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<v Speaker 4>its impact in terms of dilution, and they voted in

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<v Speaker 4>favor of it. It's safe to say that no shareholder

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<v Speaker 4>cast their vote under a mistaken belief about the independence

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<v Speaker 4>of Elon's board. Yet that turned out to be crucial

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<v Speaker 4>for the Delaware decision, and it's a sign of the

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<v Speaker 4>way in which our beliefs about corporate governance have begun

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<v Speaker 4>increasingly to diverge from reality.

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<v Speaker 3>We only have twenty seconds left. But what about Fox Corp?

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<v Speaker 3>News Corp. Because there's this great New York Times story

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<v Speaker 3>last week about the secret battle for the future of

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<v Speaker 3>the Murdoch Empire.

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<v Speaker 4>Very briefly, well, it's a great question. Now, I'm not

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<v Speaker 4>trying to judge in twenty seconds, but it is a

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<v Speaker 4>sign that often the most important parts of corporate governance

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<v Speaker 4>aren't about who's the independent director or whether or not

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<v Speaker 4>the shareholders have majority voting. It's about the character and

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<v Speaker 4>personalities leading the company.

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<v Speaker 3>All right, we're gonna have to leave it there, Thanks

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<v Speaker 3>so much for joining us. That's Professor Bryce Tingle. His

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<v Speaker 3>new book is called Hard Lessons in Corporate Governance. He's

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<v Speaker 3>business law professor at the University of Calgary. Joining us

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<v Speaker 3>from Calgary.

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<v Speaker 1>It's a really timey topic. We kind of talk about

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<v Speaker 1>it a lot, corporate governance.

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