T2 E11 - ¨EVOK: Más que chocolate, una historia de valentía y reinvención¨ Con Nora y Cesar

Hi everyone, I want to tell you all about another podcast I think you'll enjoy. College Matters from the Chronicle. College Matters is a weekly show from the Chronicle of Higher Education, and it's a great resource for news and analysis about colleges and universities. You'll hear sharp discussions with Chronicle journalists, offering fresh perspectives on the latest salvos from the Trump administration, and keen insights about how faculty and students are adapting to technological changes. College Matters also features incisive interviews with newsmakers, including recent conversations with Chris Eisgruber, Princeton University's president, and Rick Singer, who is best known as the mastermind of the varsity blues admission scandal. Check out College Matters, wherever you get your podcasts. Welcome to the new Books Network. I am Alfred Marcus, and this is on the CUSP between Strategy and Ethics, where we explore how organizations navigate the tensions between performance, innovation, and responsibility. Today I'm speaking with Donald H. Tew Jr., longtime editor of the Journal of Applied Corporate Finance, and author of the Making of Modern Corporate Finance, a history of the ideas and how they helped build the wealth of nations, published by Columbia University Press in 2025. The book traces how relatively small set of ideas about capital allocation, leverage, governance, and risk management helped move US corporations from the conglomerate era of the 1970s to the more disciplined market-driven system we see today. Don, thank you very much for joining me. To begin, could you tell listeners a bit about your background and why you decided to write this particular book now? How did your work at the Journal of Applied Corporate Finance shape the way you tell this history? By the way, this is a great book and it tells a very important history and it's quite unique. I've been looking for this book for only one thing, what book like it? Well, thank you, Alfie, for all the kind words and for taking the trouble to actually read my book. I've found very few readers have been few and far between. And it was a wonderful summary of the book, which you gave. So I don't offer any counter to that as well. So again, thank you very much for listening to me. Now if I remember what the question was, oh yeah. Why did you decide to write this book name? Yeah, I mean, some, well, I think I was, some 50 years ago, I did, I did a PhD in English on self and society and Melville Conrad and Faulkner. And I was concerned with the topic of, it was really about the conflict between what people want to accomplish for themselves and then what they want to see in their surrounding, the order, the local community, they want stability and order and they want freedom. And so, but people didn't seem interested in this topic 50 years ago when I was trying to get my, launch my career. So I moved over to the business school at the University of Rochester and did an MBA in corporate finance. And the, and from there I was hired by a man named Joel Stern at the Chase Man Hatton Bank that had an internal financial consulting group that was based on university of Chicago training and principles, how to apply the Chicago theory of finance to the modern corporate enterprise. And so we developed a, what we call a, the principles of modern corporate finance to apply to businesses, which were being run according to, we saw as old fashioned corporate finance. Old fashioned corporate finance was the idea that the corporation, the shareholders were one of many constituencies you had to take care of and the way you took care of them, well, I was, but was by reporting steady increases in earnings per share. You kept your debt ratios low and you just, you basically, and you, you, you made sure you reported enough earnings in order to keep shareholders behind you. But what this led to was the conglomerate movement in which corporations, the, they, they turned themselves into all weather growth companies. They wanted to be all things to all people. So they, they diversified like mad and this allowed them to make their earnings target, but they really didn't create much value for shareholders. And so we, we were thought of ourselves as kind of helping initiate this new year of modern corporate finance. And we, the mantra of our firm was earnings per share, don't count and dividends don't matter. What mattered was earning high rates of return for your shareholders and doing lots of it, investing where investments look good, but also cutting back on investments where they were bad. I'm going to take a breath now because I think I've gotten way off the rails. But tell me if where I can take this for me. So you argue early in the book that American style corporate finance has been a great success story. So what you mean by that is American style is this Chicago principles where we're looking at growth in the price of the stock as opposed to dividends or earnings per share. I'm assuming. And, and where there's greater agency of accountability to, to management. And you say it's on the, on this American style corporate finance is on the par with advances in medicine and information technology, which is an amazing claim. No, I meant to be as provocative as possible. But let me explain what I mean by that. The book starts with Adam Smith. Adam Smith said that private sector productivity is really source of all economic and social wealth. All the good, all the health education and welfare that we value most comes out of the ability of our private sector. And this includes nonprofits to actually do more with less. In other words, they, they, and it's, and what drives this productivity is, it's advances in technology that then get commercialized. So it's commercialized technology that ends up leading to productivity, which ends up putting the, you know, the, again, it pays for the health education and welfare. And corporate finance is actually the process of directing that, that productivity. Corporate finance basically takes money and allocates it to, to promising technologies. And it takes it out of failing technologies. And America does that better than anybody else because we have investors breeding down managers next saying, if you don't produce, we are going to take the capital out of your companies and put it into companies where they can use it. So corporate finance is the visible hand of shumpaders creative destruction in which we get rid of failing technologies and funnel the money into new technologies. And that's, that's why we have our world leading growth sector. But it's all based on, on product, it gains in productivity. Can you imagine any abuse in this system in, in, in sense of, uh, pressures on corporate, uh, corporations to make sure term gains as opposed to long term gains? I think it's that's, they're, they're, they're, they're, they're all the time. In fact, Adam Smith said that the public corporation could not work in his view. This is one of the great failings of Adam Smith. He, he thought no business could become larger than a small, you know, partnership because the system could not keep managers from spending money on their own purposes rather than serving their shareholders. So this is 250 years ago. Adam Smith said the public corporation, the joint stock company will not work. 200 years later in 1976, Michael Jensen and Bill Meckling write a paper in which they show what, how and why it is the corporation has become the dominant organization in the world. And it's, it's about ways to control managerials, behavior and decision making so that it ends up serving their shareholders. But it, it, it, we're obviously works some places better than others, but, uh, yeah, yeah, yeah. So that's, that system, um, it wasn't working in the United States in a maximizing way for shareholder wealth and, uh, Jensen, there, there were host, hostile takeovers were a part of the process that then occurred and then we also, um, had, uh, the, the, uh, managers getting stock auctions in, in, is a higher percentage. Those were two of the ways of control that were introduced. It, why don't you tell that story? When did it happen and why? Well, in the, um, well, if you go back to the 20s, JP Morgan owned huge chunks of stock and sat on boards and that was the, it was really an investor, founder driven capitalist model in which the owners were and affect the managers or they controlled them tightly. Then we had the, the great depression and we had glass, steagle and a whole set of regulations that basically said we do not want bankers on our boards. We do not want investors controlling our companies. So the next 40 or 50 years under the auspices of Adolf Burrell, uh, was to basically separate, uh, managers, actually separate investors and shareholders from control of the corporation. We, we were, again, the, the, the shareholder was viewed as one among many constituencies to be served and the managers basically became the de facto controllers of corporations, professional managers in tandem with regulators who protected, you know, the US was kind of, there was not much competition. for American industry until the 70s. So we flourished in Prosperd. We had growth in middle class wages. There was the envy of the world. And these were the golden years. But once global competition set in, then the companies were no longer able to compete. And they can glomerate it in part because of antitrust rule. Antitrust basically prevented companies from acquiring near horizontal acquisitions. So they bought unrelated businesses. And this created this massive loss of value, which then cried out for the rise of active investors. Hostel takeovers, leverage buyouts, the reassertion of investor control. So what brought it to an end? How did it end? Was it just poor performance on the part of companies? The hostile takeovers? Was it Jensen's famous papers? They brought this to an end. What were-- It was all the above. I mean, at one point, the S&P 500 lost half its value in the mid-70s. So investors were looking at these conglomerates saying, if I add up the pieces outstanding alone, they're probably twice as valuable as the market value of the companies. So this provided clear incentives for active investors to take positions and compete, take them over, and then just separate the pieces, sell them off, spin them off, and leverage those at all. It's still going on with private equity today. Absolutely. I argue in my book that the 80s set off a 45-year period of continuous restructuring. America continuously restructures. It's called the-- Jensen calls it the third industrial revolution. But that's-- there is a theory-- Rick Reader at BlackRock has a theory that we no longer have recessions-- economy-wide, because active investors actually go around creating many recessions in a variety of different industries. Our tech industry had a many recession in 2023 when they had massive layoffs. And our tech industry is now in the midst of a many recession, where they are pressing companies. They over-encired. They over-acquired. And so this through this continuous process of restructuring our active investors sort of reduce the need for an economy-wide recession. Why are conglomerates a poor generator of value? Because they misallocate capital. In other words, if you have a core business that's suffering, your temptation is to feed that business, to forget it back on its feet. But what ends is all your growth businesses end up getting starved. All your new promising technologies end up sitting there waiting for money, which never comes, because they're not run by the heads. But one of the great stories in the last two years or so, which I've read almost nothing about, is General Electric. Electric under Jack Welch was probably the greatest old-fashioned corporate finance corporation ever created. That was a conglomerate. And it was based on meeting your earnings target every quarter and using the profits and flexibility from your financial businesses to invest in God knows what. Anything, anything that Welch wanted, NBC, if it was glamorous, he could make it work because he was kind of an accounting major. He was also a very good manager. But then the next two or three guys that inherited the company couldn't make that work. Jeff ML just staggered under the weight of this conglomerate. So finally, Larry Kulp, after GM almost went out of business, there was the guy that called the made-off scandal, said that he called a press conference saying GE was bound to fail, about three years ago. He said he was taking a short position and telling everybody on Bloomberg that GE was about to fail. Well, Larry Kulp has since he got rid of all the finance businesses, capped a long-term care liability, and he recently separated the company into three public standing businesses. And that company is now worth-- like, double what Jack Welch had it at at the end of the 1980s. I mean, it is a magnificent feat of value creation. And if you read Bill Cohen's book, he doesn't foresee it coming. He actually disparages Larry Kulp as a manager. And in the pet-- I think GE increased his value by 50% a year ago. So GE, this is up to doing. It's happening a lot right now. These investigators, like Johnson and Johnson, it's also split up into three. And Kellogg's has basically du-pont and Dow came to Gagher and then split up. This is-- Well, I believe technology. Yeah, yeah. I think we can-- there are maybe 10 examples of this right now. But yesterday I read in the newspaper in the Wall Street Journal that Hines Kraft-- they were originally going to split up. And they decided that they could stay together and get more value at least the current CEO. He reversed that. Well, Hines Kraft is a great illustration of short-sightedness. That's a company that actually did it cut back on investment to meet its earnings targets. And the great irony of all-- and this was-- this was discovered. They were outed and they lost a ton of value because they were under-investing in their future. But the great irony here is that one of their largest holders was Warren Buffett, who was spokesman for long-term value investing. And here, the here, he's invested in this Hines company, which is just basically trying to create value by cutting out investment. And that's-- that is not a prescription for value. And that's one of the biggest lessons in my book. It's managers, corporate managers may be short-sighted, but markets are far-sighted. So managers may think they have to meet an earnings target. But if you keep holding up earnings targets and cutting investment to meet them, you're going to be sure logged. Like to company like Intel, I think also was hurt, a great deal, by short-term market pressures, which didn't allow to make the long-term investments that could have made it-- People did replace no faith in Pat Gelsinger. I mean, they did not trust them. So you have to earn the markets trust. So then you take investments. But if people don't think they're going to pay off, you're not going to get credit. But if you noticed what happened under the new owner who was on board, the company has suddenly turned around because this is like an active investor, but also an insider who steps in and changes the whole course of the company. And again, this is the glory of American capitalism. When something is not working, investors step in and they bring about change. And it's changed from the outside. Although this was guy-- this was guy who was actually on the board. So it's he's so insolent and an outsider at the same time. What about Gelsinger? Why didn't the board-- why didn't the market have faith in him? I don't know enough about the business, but he had been begging for public funds-- and everybody wants public funds-- talking a great game. But it was never paying off. There was never investment never paid off. And whereas Jeff Bezos could keep investing for years without any profits. But then suddenly, he showed that the payoffs were coming all the time. Becoming right to the contrast, the first two chapters in the book that I'm about to write about Intel and Amazon. And I think that's absolutely true. And that Bezos does a great job of creating confidence that in Wall Street, he was very transparent. He actually wrote his own letters to his holders. Yeah, which I read many of them. And he would say right up front, he said to his shareholders, he would say things like, we're not in this to make immediate profits. You can be a fool and not invest in us. But he really-- he almost challenges him like that. You know he does. He says, if you care about gap earnings, but given the choice between gap earnings and doing the right thing, we will always forego the earnings. We really don't want you as a shareholder. If that's all you care about, the next quarter's earnings. We're investing for the long term. And that's the kind of people we want. He almost insults the shareholders in some of these letters. Well, he and Bob, but some investors are to be insulted. In the GE book by Bill Cohan, there's a scene where Jeff Emelt, when he first steps into the job, he goes around and meets the institutional investors. And he finds out that they don't even know what business is he in. I mean, he thought his investors were stupid. And that's my theory is the GE attracted a bunch of earnings groupies who followed Jack Welch around for 20 years and said, as long as he meets his earnings targets, we're going to give him the benefit of the doubt. But they never understood how the business worked. And what was driving it? And that's what active investors are informed investors. They get involved. And that's the kind of people you want to attract here. A company that's one of the lessons of my book. You can change the value of the company by increasing the quality of your investors by getting longer term investors. But Welch is formula. I don't know if it would work today, because some of many of his Well, Coppolis is student, I guess. Coppolis worked for, for well, is that true? And I put, are you sure about that? I could be wrong about that. Hoping out of Danaheer, which is an incredibly success. Right. Yes, Danaheer is an amazing conglomerate. It's a conglomerate. Yeah. And he runs a conglomer like a private equity firm. Every, so does Warren Buffett, by the way. Warren, I view Warren Buffett as a very well-run private equity firm, in which, you know, every manager has a large equity stake in his or her business. And they determine their own investment requirements. And the business needs capital. You know, they have access. So this is, again, it's not like a conventional conglomerate, which subsidizes each other. But it's, and it's right, you always find the right manager first. And then you give that manager a lot of equity. I think Coppolis recently achieved it. It doesn't matter. The Danaheer, the Danaheer part is even more interesting. I wanted to get to McNurney, who was at 3M, and then went to Boeing and was an acolyte of. [laughs]. with acolyte. And he was a total failure. In my opinion, he destroyed two companies, great companies, 3M. Because he took away the engineering culture at 3M and at Boeing. And he also hollowed out Boeing's capabilities by farming everything out. Yeah. But with, you know, always in pursuit of earnings as well, he was always concerned that he could guide earnings and make the earnings target. Right. He's obsessed with that. Instead of really creating value, I don't know. I guess my question is, like, the Welch formula is. Is Welch really an example of what you would say is modern finance? Where is he? Oh, no. He is old-fashioned corporate finance. Okay. Okay. I might. No, but I'm going to confuse you here. His financial management principles are old-fashioned. He believed. He's a concomerant guy. Well, yeah, but the thing is, he believed that he had to produce earnings per share every quarter. He. Unlike. See, Bezos freed himself from that constraint. So Welch said, "Okay, how do I get earnings every quarter?" Well, I buy finance companies. Because I can manipulate the hell out of those earnings. I can put any earnings I want. And so he viewed. I mean, he was also a great manager. He turned NBC around. He. He showed himself. He has a great ability to run companies and get the most out of people. But at the same time, he had a flawed financial model, which limited what you can do. And that's why nobody else could run it. Because they weren't. He was a management genius. The old school is really about earnings per share. The new school's about growth in the value of the company. It's the growth. It's the growth? The growth company versus the dividend giving company in a sense. Well, no, you can. No, no, no, that's wrong. There are two ways to create value. You can create growth like Amazon. But you can also eliminate unprofitable growth, which is what a lot of private equity is. A lot of private equity is cutting back on bad growth. I mean, that's one of the principles of my book. There's good growth and bad growth. If you're not earning your cost to capital, it is your duty to get out of the business, to pay the capital out, pay it in dividends or stock buybacks, so that that money can be recycled into the economy. This is what people don't understand about. The role of finance in taking out companies that are outlive their use, their productive lives. Finance takes them out by reducing their share prices, then having them taken over, leveraged up, or eventually dismantled. And that capital gets released to fund our great world leading growth sector. So the Raiders are the heroes? Yeah. The Raiders, I mean, as ugly as they are, people that we all love to hate, and they repeatedly embarrass themselves, they are nonetheless performing an incredibly socially productive service by, again, eliminating waste, excess capital. The RGR and the Biscoe story is really remarkable. I mean, that just says it all, what Ross Johnson, he ended up. The company was selling at 12 billion market cap and KKR ended up paying 25 billion for that firm, because he was just wasting capital and he was hiding it. He would instruct managers to waste capital on promotions of for Oreos so that the Raiders would not see the profitability of the firm. The extent of corporate waste is hard. That's why Michael Jensen said that the barbarians were really inside the gates. They're not the outsiders. Well, why don't you talk a little bit about Jensen, the other greats in three intellectual schools you talk about for the come from Chicago, Mert Miller, from Rochester, Michael Jensen, and William Meckling and MIT with Stuart Myers. Why don't you give me a glass on all three of those? Did you know any of those guys? Did you. You work Miller? No, but I certainly knew. I know they're work, but I don't know those personally. A Mert Miller at the University of Chicago is viewed as the father of modern corporate finance. The Miller and Magigliani propositions basically say that leverage does not matter. How you finance a business doesn't matter. He said, earnings, you know, finance, leverage, and that don't matter, but what matters is investment. Are you earning adequate rates of return in your capital or not? And if you are, then the more investment, the better. But if you're earning less than your cost to capital, then it's your duty to get rid of the capital and give it back. So that's really. That's the Chicago's theory of value in a nutshell. You know, leverage does. Leverage is not a first order determined or value, but what matters is the investment decision. What you do with the capital? Do you earn the cost to capital or not? Michael Jensen came along and said, "Well, leverage actually does matter because it affects the decisions that managers take." So if you're a mature company and you don't have any debt, you don't have any growth opportunities, but you don't have any debt, you're going to waste that capital. You're going to keep doing what you did and your value is going to get lower and lower. So leverage in that situation can increase the value of the firm as a control device. The debt forces managers to pay out the excess capital. That's the theory. And it keeps them from doing diversifying acquisitions. And then now, on the other hand, Stuart Myers came along and said, "Well, okay, if that were. If everything. If Mike had told the whole story, then you'd want every company to leverage it up 99 to 1. If leverage is so good, then why don't we have all leverage?" And Stuart said, "Well, if you have too much leverage and you're a growth company, you're going to turn down valuable growth opportunities." That's called the underinvestment problem. So Jensen was currently concerned primarily with the overinvestment problem. Stuart Myers was concerned with the underinvestment problem. How do we keep companies from investing in all. The duty of management is to take all NPV increasing opportunities, but to walk away from all the value reducing opportunities. So that's the theory in nutshell. Merton Miller said, "All that matters is taking the right investment opportunities." Jensen said, "Okay, use debt if you have too much capital and no growth opportunities, you've got to get rid of the capital. The importance of exit." Which again, nobody in the newspapers focuses on the value of exit. And then the underinvestment problem, which everybody focuses on, is what Stuart Myers showed us in the MIT school. So. Stuart Myers, if you have too much debt, how does it discipline managers? What does that lead to? I mean, it would seem that there would be profitable opportunities you couldn't follow up on. If you have too much debt, let's say. Well, no, it is. If you have them. Yeah. If you have them. But the question is, for a company, like I began, even to this day, can only use about half the cash flow that it throws off. And some theorists say, "You have to pay that out." That capital is going to fester. It's going to managers are going to be tempted to waste it once it's there. So you've got to pay out the capital that you have no foreseeable use for. And if you need the capital, you can always go back out and raise it again. I mean, there are models like a reeds of some kind where you actually. And utilities do this, too. They give the capital back every period. And then they go out and raise equity every two years. And what that does is you have to go back to your investors and ask for permission to get the new capital. And to give it back, you mean in form of dividend? Stock repurchase. Stock repurchase. Right, Stock repurchase is just another way. And debt, because the debt has a contractual return of principle and interest. So that is. Gentson calls it cash discouragement. You have to. You know, companies usually pay out pretty low levels of dividends. You know, before 1958. You're right. Before they couldn't do it, they couldn't repurchase. In 1958, the market would not put a high enough price on your shares. So they wanted a higher dividend payout than your debt coupon rate. So in other words, they didn't trust managers to use the capital productively. So they insisted on the dividend. They would not put your price high enough to get. You had to have a dividend yield of 5 or 6%. percent. And so you ended up the limits on price earnings ratios were about 10, you know, in the 50s, if you were a mature company. It's stock repurchases become common. If dividends gone down generally, no, but they're on a part. I think repurchases surpass dividends, but they're about the same. And the best story I've heard about dividends versus repurchases is that dividends get paid out of your normal earnings. So it's if you look at a corporate earnings stream and you take the trajectory, you're going to pay out say two thirds, three quarters of that. And then the stock repurchases are used to pay out the windfalls, all the deviations around that normal level of earnings. So abnormal earnings gets paid out as stock repurchases. You talk in the book about private equity and Stephen Tappwerens work. And now I'm not personally again, but I definitely know about his work. So what is private equity get right about ownership incentives and operational discipline that probably companies still struggle to match? And then what are the, and then you can go on that, you know, you don't mantisize private equity. So what are your critiques of private equity? Are everybody else think that I am so over the top that really they do? Yes, they're. Yes, because I call them what they call me. I'm private equity on corporate. But in it's in general. Okay, so what about private equity? How would you, where would you, you know, what are the pluses and the minuses? I guess the private equity and Kaplan is a big he's a he's a celebrator of private equity. That's no, he's I would call him the world's foremost scholar of private equity. Mike Jensen's disciple, he worked for him at Harvard. He did his PhD dissertation for Jensen at Harvard on the first wave of VELBOs. He looked at their operating performance. And he discovered they, you know, they basically increased the the operating earnings about 10% a year and they doubled the enterprise value, debt plus equity of these companies in short period of time. And the argument is that they they concentrate ownership. They, you know, instead of this fragment and ownership where nobody controls managers, they buy the whole firm. They give management. I actually, I think the private, the average private equity firm owns about 60% of the companies they invest in. And they, and the managers own maybe 10%. And then they, so and they, the owners sit on the boards of these companies and they, they have board meetings, you know, monthly in some cases. So the, the, the intensity of the scrutiny of the managers by the investors. And this also, this is also true of venture capital by the LBOs private equity and venture capital have the same capital structure. They're just applied to different, you know, venture capital's pure growth. So they use no debt. Whereas LBOs are slow growth to middle growth. So they use large amounts of debt. You know, the first LBOs had 90% debt because they generated so much cash. So this was a way of limiting corporate waste and, and focusing managers on generating cash flow and inefficiency because again, they weren't worried about growth opportunities. Now over the last three or four decades, LBOs of the private equity firms have acquired more operating and managerial expertise. And they've, they've bought firms with more growth opportunities so they've used progressively less debt to the point where I'd say the, the, the debt ratio today of private equity firms, a private equity owned companies is about 50%. So they have really moved from the extreme cost-cutting edge of the spectrum to sort of to the middle and they can run, companies like Silver Lake can manage growth firms and they do it with, you know, very, very little equity. But again, the story is concentrated ownership and overs intensive oversight of the investors over their managers and the managers have huge equity stakes as well. And all this is very different from our public companies. Where the number of public companies actually has been going down as I understand it, we're, yeah, it's about half what it once was and private equities is growing very rapidly in the region. But the public company average public company is something like eight times the size of the average private company and that gap has actually been growing over time. So even though there are half the public companies that there's a study by Espen Ekbo at Dartmouth that shows that if you take all the large mergers that were done inside some of these largest companies, you would actually get back to around that 8,000 number. So there are certain companies that know how to run companies that have just gotten larger and larger, but there's fewer of them. So I, you know, private equity is 10% of public equity as if you want. In terms of how large it is in the larger economy, but even so the companies that are still listed are getting bigger and that private equity is, is the performance of private equity when Kaplan did a study was at least he could show that it was outstanding as he just said. And out for foreign public equity, I mean for the first, you know, first it was from 1989 to 2003. I say our 2023 and only now are doubts, and if this can be, yeah. I think the last couple of years they've had real and bad returns. It's a private equity here. Well, they have not had that. Yeah, I mean, it's on average. There's so many, I guess the problem is that there's so many companies that have new private equity companies have entered. So you don't know how yes, that's right. That's right. So if you're an institutional investor and you're lining up for your private equity allocation, you don't go to the new firms. You go to the black stones and KKRs. And I believe those firms have continued to outperform, but maybe not by as much. But, but the other problem is comparisons to the S&P over the last few years are really, the S&P is just done so incredibly well. I mean, just amazingly well. So it's almost, it's an unfair comparison to private equity because you have all these remarkable growth companies that have sort of pushed the S&P return upward. And so I don't think you're going to expect, if private equity continues to do its 15% or whatever, they're doing a great job. And there's no shortage of people who want to invest in private equity. I think the number is lower than that. It's not 15% today. That's right. I think I think if this is based on memory, I think it's eight or nine actually the last year and last year. Yeah, last year. I think that that's true. But I could be wrong. You also have a critique of private equity. So what's your critique of private equity? Well, the reason is that there are lots of businesses where government plays a huge role as the funder and regulator, such as healthcare, education and the problem with private equity is that they can, if regulators do a bad job, private equity will find them out and they will exploit these regulatory loopholes like the private for-profit college business, for example. Private equity found ways to extort the wrong word but get government money for their students and wait, it's just not productive. And some of their nursing homes didn't work out well. Some of the lesser reputable private equity firms did a bad job with nursing care. So the whole industry gets tarnished by what Steve calls the transients. These new private equity players that come in and out and yet they do a bad job because they don't have a reputation to protect. So any business where value maximization has problems, which again, education is one of them. Healthcare, if the government is the main payer and healthcare, you just know you're not going to get, you're going to create problems. So. On the other hand, private equity because they have freedom from public markets, you can also find conceivably a lot of corporate social responsibility in maybe not in private equity itself, but in private ownership. Because the owners can do more of what they want without the pressure of election. But that, no, that would be true of a private family owned business. Yes, tries a family on private equity. No, yeah. Private equity has, you know, people on the end that are, yeah, they're limited partners expected 80, but if you own your own business, you can do whatever you want, which is, which is why, you know, you can have the lovable owner of the private family business that never, never laid off a person. And the problem with that, although, you know, it's wonderful and people who do that are be, to be completely commended. But if they start to have lots of relatives and large families, then they're going to push for more efficiency and And if you want to go public, you know, and get really rich, then you're going to meet outside owners. But which is, that's what happens in Europe, by the way. You know, in America, family businesses, if they get large enough, most of them tend to go public, just because they have so many errors that need to be fed. But in Europe, the governance systems are so bad that the family owned businesses can't get a high enough value that they're tempted to sell because they just, they won't be enough reward for all the family members. So they stay private. And this is true of Germany, this is true of Italy. It's the, I haven't told recently that Nova Nordisk is owned by a foundation. And is that, are you aware of that? And then that really affects their whole operation. I mean, it's, it's not completely, it's publicly traded. I own shares in the word you said, you know, but, but the, who was the majority holder? Yeah, it's a foundation, a charitable foundation is the majority owners. I think it's, that's what I was told recently in a pie cast. I did 60% of Nova, or 60% okay. 50% is owned by a foundation, a charitable foundation. And the argument that was made was because of that ownership, it's going to be able to get through this, this rough period very well because they have long term goals in mind. And, and, and, and, because, I mean, they've, they've made such outstanding mistakes recently. You would think that Nova would be a sad luck for, how the foundation let that happen. Is this controversy over the pricing of insulin? Yes. Well, it's, it's wegg ofy. You know, they, they were the first with the, if the diet, the, the weight, weight, loss in drugs, but then they didn't have to, when the demand shot up, they didn't have the spider to meet it. And him and hers came in and, and they, and they walloped them. And the price just felt, Lily took off and, and Lily's product is somewhat better. So anyhow, that's a whole other story. But, well, you would agree with me that, Ili lilies is much more promising for its investor shareholders than no one or D's, right? I mean, yeah, absolutely. No, but, I'm on our disk will survive. But I don't think it's ever going to earn huge rates of return. And, you know, and yes, they perform a social function. But I think Ili lily is going to have much more capital to grow. And, and no, that's, that's, would be the place. But certainly, certainly been this story so far as an investor in both of them. I thought, weight, loss, drugs would be the biggest, biggest boom dog on history. And I went big for both of them. And I'm being my lily investment has been great in my, no, not not so good. Not so good at all. Yeah, no, well, that's, that is the story of America versus Europe, not Shell. European companies are not run for their investors. They're not run for shareholders. They're run for their, no, we would, you say that's true. Also, let's say of Chinese Korean companies, Asian companies. And, and does that, I mean, in some ways, does that provide them with an advantage over American companies or not? It allows them to take losses for as long as they want. Right. And they don't have to return as much to investors. They rarely do return any. Yeah. Well, they don't, they don't, they don't, they don't, in fact, you know, Donald Trump is actually now, he's, he's demonized, shareholder returns, returning capital as an act of unpatriotism. But it's in the country. It's an act of, you're saying, you're acknowledging, your commitment to your investors to be efficient. And sure, China can invest forever in developing certain technologies. And they will throw massive amounts of both government and maybe some investor money. But I don't expect these companies to become profitable. And their stock market, as I say in my book, actually has negative rates of return since 1993. I mean, that, who, and so the Chinese people do not as a rule invest in their own stock market, nor do the Germans. The Germans were burned by their noia marked scandals and then, and then I need. And so Germans don't trust their market. The Japanese people really have not, they had no returns for 30 years. And now they've had a couple good years in recent times. But that's in part because Warren Buffett took a large stake in Japanese companies about a year or two ago. And then about a year ago, the spokesman for the Kaiden Ren, which is the Japanese business round table, made a public announcement. He said, we recognize our companies have been in a slumber for 30 years. We are inviting American shareholder activists to come over, take positions on our companies and help them become more efficient. And I said, you know, why was this not emblazoned in large bold letters on the front of every newspaper in America? And nobody carried it. Yeah, so, you know, Japan is acknowledged that their government system is a failure. And seeing that the relationship between the national economies growth and vitality isn't perfectly correlated with the type of shareholder governance system that's in place. Because we do have examples of the so-called Anglo-Saxon model, which is our model as opposed to the other model. We have examples like our economy has been pretty vital, but the Chinese economy arguably is outperformed our model in the last, let's say, 10 years. So I don't agree with that at all. Okay. And just, oh, yes, they have. I mean, they've raised a lot of people out of poverty, but their GDP per capita is out of quarter of ours, the poverty of the country, and their labor market is terrible. And companies, you know, even the most famous electric vehicle maker in the world just declared record losses last week. You know, so this is the company we're all being taught to emulate, and it's lost half its market value. The YD here? Yeah. And they have not knew. How can you, how can an economy support 90 EV makers? They're all lose money. So, and I would argue that, that can't work. You can't build a system in which companies don't make money, because they will run out of it. That's not sustainable. Endless subsidies from the government in support. That's local. Local municipalities actually subsidize their failing and even bankrupt businesses. I mean, this impality will beg a company out bankruptcy to employ more people. You can't, you're going to run out of money if you keep doing that. And I believe that, I believe that's what's going on. But, and that's what Carl Walters said, the guy featured in my book. Yeah. So, we should worry less about China. I think they are in very deep trouble. And I mean, they have other, there's so many potential crises that could occur. The demographic cliff. You go down by 75%. How would you feel? Now, multiply that by 80% of Chinese households watch the equity in their houses. To housing. So, the story I saw was this port town where all the nightclubs were empty. I mean, this was a fraud-ming port center of culture and music. And the reporter goes in, nothing happening. There's no lights. And there's 20% unemployment among college gradians right right now. And no opportunities. Did you read Dan Wang's book, Breakneck? I think that's, I didn't read the book, but I definitely know about the argument's tremendous. Why don't you repeat the argument for our listeners? Or I can repeat it, you know, that the America is a country of engineers in China is, I mean, America's company of lawyers, China is a country of engineers. And an engineer for any problem occurs, engineer builds more. And so you have tremendous trains in China. The cities, I heard the statistic that 90% of Chinese living dwellings that have been built since the 1950s, you know, a tremendous amount of new housing built. But in America, the answer to all problems is let's slow it down and see if it hits some. He's comparing the Chinese government to the American government. And I agree. The American government is lawyers. Yes, it's completely inefficient. You know, so it's like my book is about the US private sector. And the US private sector in my book is so much more efficient and valuable than the Chinese. The comparison is almost laughing. I'm going to ask you another question. What about private equity? I mean, private debt. A lot of debt has been privatized. And I get very nervous about that because there have been, you know, there's some calls now that this is for perhaps problematic. So what is your view of that? Well, part of the private, the success of private credit reflects in part the limitations of our bank system. That back just have never, it's disaster prone technology. I believe it contributed greatly to the global financial crisis. And it wasn't the bank's fault. They were basically required to make bad loans. And they didn't put up much of a fight. And so they ended up with what? They were issuing mortgages at $0.00 on the dollar that were only worth $90. And if you have $4.6 trillion of bad mortgages on your bank balance sheet, that's why the government had to pump in $500 billion to plug that whole. And Steve Kaplan has done a wonderful survey of bankers versus private credit. And he's determined that bankers actually lend against assets, private credit lends against cash flows. So that is why a company can lever up. If you know the cash flow, you can lever a company up to 60, 70, 80%. If you're willing to get assets, your leverage is going to be a fraction of that. But the private credit people charge more. So they make much larger loans and they charge more. And I'm told they earn something like 400 basis points more than banks do on a return on assets, which is just an astonishing gap, profitability gap. But the bankers just don't have right, and the regulations after Dodd-Frank penalized banks for making loans. So the banks were hamstrung, even if the good bankers ended up, they all moved over to private credit. And I view private credit as an extension of Michael Milken's high yield business. Michael Milken had the insight back in the 80s that you could make a lot of money by lending to non-investment-grade credits. But you had to be prepared to reorganize them. Now, he knew he was lending high against cash flows. He would charge a lot of money. And if they got in trouble, they were prepared to change the debt into equity at the drop of a hat. He knew all the investors. So they were lined up. And if Mike said, OK, this is over leverage, we now need to kick in some more equity. You could reorganize these companies. It's a different business model. Michael Milken is the intellectual father of private credit. You could say everything private credit is done could be laid up to his-- And private? It's sort of the private equity model, too, that he invented. Well, yeah. But yes, but that's-- Mike wasn't really an equity hold. But he certainly played a critical role in any fund-and-renewed CEOs. Yeah. Now, I'm Michael Jensen and Michael-- Michael Jensen and Michael Milken are the two-- the academic hero is Michael Jensen, the practitioner hero of my book, "Might be Michael Milken." Yeah. And there's so much that I want to cover. But what about EVA and Stern Stewart? Do you talk about that? It looked like a coherent way to connect capital charges and sent of pay and value creation. Yet, you describe it to Isaac Walker. I want to-- Yeah, I wanted to use Stern's EVA in my research. And I don't know. I sort of gave up. I don't remember why. But with that, it's probably not very good. And there were only 160 some companies who were actually EVA clients. And the EVA-- people just don't calculate EVA, the statistics keepers. But the base against side of EVA is that equity capital has a cost. And it's not reflected on accounting statements. There's no accounting item on the P&L for cost of equity capital. And so that led managers to believe that equity is free. And that's how the Chinese view equity, by the way. They have openly said, we raise capital from foreigners. It's free. We don't have to return any money. We know that. And we're quite open about it. But the American managers behaved as if equity were free. So they would waste capital just to produce growth enough to produce earnings. But they were actually earning a substandard rate of return. So we put equity back on the balance sheet. Now that works well for mature companies that are throwing off a lot of cash flow. But it wouldn't work for Amazon. Because Amazon-- there's no real EVA left, even. Because they're actually spending so much money faster than they're taking it in. You would be hard pressed to get an EVA calculation to make Amazon work. You could capitalize all their expenditures, like R&D, and maybe get something close to it. But that helps. EOP, and Jensen and CEO pay and stock options as a way pay for performance essentially. That's what stock options mean for top management. For top management. They don't necessarily mean that. But if well structured, they can. But it always seems like the Wastro Journal published and say, the highest paid executive, his company's-- the return to Cheryl was negative 30%. There's always that headline. So it doesn't really work. And even Jensen himself has said that some of this was-- he's gone too far. What's your view on it? Well, back in the '80s, Jensen wrote this article saying that US CEOs are paid like bureaucrats. I mean, they make less money than-- well, certainly far less money than top law firms and athletes and things like that. And saying, well, you know, some people say that's fair enough. The problem was there was no payoff for huge performance, which is what private equity does. private equity gives the manager a large block of stock on day one and says, let's see what you can do. And so over time, US companies started to-- they listened to Jensen. Jensen, what became an authority on the subject, even the New Yorker. The New Yorker called Michael's great apologists for CEO pay and blamed it on him, of course. But the problem is that the options were, to some extent, but the way they got ended up being given out was very different from private equity. It's competitive pay practices involved. They recalibrate every year. So if your stock price goes down, you actually get more stock to ensure that you have the same level stock in the beginning. And if you go way up, you actually get fewer shares. And this became incredibly widespread practice. So my friend, Steve O'Burn, to which my chapter on whom my chapter on CEO paid draws, said that, you know, this is-- it actually ended up reducing pay for performance. This tendency of companies to do this. Before the 1950s or before the 1970s, the profitability was what drove CEO equity pay. But after the 70s, the payouts started coming for growth. So you end up just getting more-- you get higher rewards for producing growth and size. And again, the way the stock was paid out ended up reducing the pay for performance correlation. And some of the largest companies you could end up, you could get paid just for-- you could preside for five years. Watch the price go way down and then just bring it back to the normal level and get a massive payout. So the result of all this was that the worst US CEO's get paid way too much. But the best US CEO's get paid way too little. And then way too little for their performance. What they actually-- Black right now. Well, I'm not sure. I think they've learned some of the lessons. But no, you have to be-- there have to be rewards for success. And the question is, large enough. And I think they're still not as large as they are for private equity. And then are there costs for bad performance? And they're not big enough. You can still-- I mean, the average CEO that CEO turnover is much higher today. So if you're a bad job, chances are you're not going to be there very long. It's almost-- it's not as bad as a pro football coach. But if you're a CEO that's not performing, you're just not going to be there very, which is good. And that's the way it should work. But they still get-- what do they call these things? Gold, golden, something. Golden Power, should you say? Yeah, those things are still-- they still have so much control that the worst CEO still get paid way too much money. That's not how people frame the discussion. Basically-- Is that-- is that-- what Jensen ended up criticizing or making something of a maya cult on his early work? So how did his thought thinking evolve? He-- well, he came to see integrity as a factor of production. He is the-- saying you're going to do something, and if you fail to do it, then you explain why immediately. So that is a key to say, the management shareholder dialogue. So you say you're going to do something. Did you do it? No. And then if you don't, you have-- and that builds trust. And you said the system-- He hated earnings guidance. Earnings guidance to him was probably a criminal practice. And he said that led to, it was a game in which managers would feed information to stock analysts and they would sort of play a game where they would manage the forecast back to the right level. And so he said this was ruining corporate America. And that, that was his real claim about the system being broken. And so stock prices could get too high because of this complicity. And so he said, we have to, and I think earnings guidance has been going down. And you know, since he made those criticisms that he has had a profound influence on the way, you know, annual earnings guidance is okay and projections. But this idea that you're holding up a target. And then if you don't, you know, some companies now are trying not to give guidance. No, that's what, no, that's been no. I did a whole series on that when I first joined Morgan Stanley in 2005, we did a diet drive against earnings guidance and said, you know, this is a bad practice. This is a form of collusion that conceals the earnings potential of the firm. You know, this back and forth between analysts and managers. Many, many, most companies meet their guides. I think in the end is that what they do. Yeah. But I guess I think far fewer companies are doing quarterly earnings guides. I think they didn't the past. I haven't followed it closely enough. And Jensen now has this idea of enlightened value maximization. What does he mean by that? And how do you, how do you make it make sense with what he said earlier? Is it consistent? Is there absolutely a place that it's a form of value maximization. But what it takes into account all the state covers in the firm that are not investors. You know, all the other people, the red, your task collectors, environmental spokesmen, employees. And what he says is that you have to take care of everybody. You can affect the value of the firm because you're the residual claim holder. You only get what's left over. So to succeed, you have to, you have to minimally, at least minimally take care of everybody. And ideally, to be a great manager, you want to inspire people. You want to earn the religions and trust. But you said you devote a dollar to every stakeholder, but only as long as you expect a dollar in return. At some point, wait down a line. And what this means is hard, very difficult. But it explains sustainability programs by Walmart, even by Exxon, companies like that. It's a little bit of a movement back to the old conglomerate theory, although it's also a movement back to, I mean, I think that was Milton Friedman's essential. A view of, of, a Hereholder maximization. It wasn't like you abandoned your stakeholders, but you, you know, I don't see you for benefit. This underfidic. Milton said the purpose of the corporation's profit, but that's not what he meant. He meant it's long run value maximization and the average worth shareholders. Yeah. No, value, the value of the debt and the equities, really what you mean. That's the enterprise value of firm. You can't screw your creditors. So some people go around, oh, it's okay to screw it. Okay. No, and then, but Jensen, Jensen basically elaborated the Friedman theory and said, you know, employees are part of the firm. You have to inspire them. You have to treat them well. You have to hold out a future for them. And I believe private equity does all those things. I mean, studies have shut, there was a study of Dutch private equity that looks at what happens to people, their career trajectories. And here's what it finds. It finds that if you are a young and rather healthy person at the beginning of your career, private equity is much better than public equity. But if you are sort of in the, senescent or declining phases, you're not going to do as well. You know, there's not going to be enough of a safety net for you. But the government will also, you know, the government steps in and pays part of that, which I believe is an appropriate system. But there's a gap there. So I've answered like too many questions. But I really do buy Jensen's model of enlightened value maximization. And one of the beauties of it is, as I argue in my book, is that companies get credit for, if they spend more money on employees or communities than they have to, I argue that they get a lower cost of capital. There are enough investors out there that like they're doing, they will actually take that as a substitute for earnings. They will say, I like you so much that I will put a higher price earnings multiple on your earnings. It's reputational capital. What? It's reputation for good governance. But it's so partaking care of other people. And you know, I think Warren Buffett would agree with me. Yeah. But it's this point in history with all the attacks on ESG and the loosening of government programs is it's still, is this the enlightened form of, yeah, it's alive and well. It's just going underground. Yeah. I mean, look at even Exxon, like Darren Woods kind of pushed back on Trump and said, I was like, we'll do Venezuela, Venezuela, work for our shareholders. And we're going to do carbon sequestration. We're going to do blue hydrogen. We're not going to do renewables and solar. That's BP did that and destroyed half its value. Okay. So B is failed ESG. That's why ESG has a bad name because it led so many companies in destroying their value. But that's not what Exxon's doing and that's not what Walmart's doing. So my book tries to distinguish between value increasing and value destroying ESG. And again, I believe value increasing ESG is alive and well. But it was very important factor. And if we lost it, that's my personal opinion that would be very bad. We I don't want to hold you any longer. This is a very great conversation. And I'm sure we could go on and on. There's somebody loose ends here that I would love to pick up on that I think we probably bring it to an end because we have to have pity on on the poor listeners. That's right. Yes. I feel for him. Yes. I'm going to take a job on. Thank you. The last question is what are you working on now? It's what's here. Do you have any major going back to my old PhD thesis? And again, it's it's self in society. Only I'm going back to literature. What literature has in my hero is John Gardner. You've ever heard the name. Yeah, he was a writer and a fiction writer, right? And this is a book called on moral fiction. Oh, yeah. And he said modern contemporary fiction writers had lost their way. They had lost sight of the big moral issues that informed great fiction like Dante, Tolstoy and Homer. And what we need is fiction that takes people seriously from all vantage points, social social conservatives, liberals. They all have to get the same room and and jost and talking out talk through their problems. We have to treat all these people with deep respect and and get out of our own narrow silo views of reality. And we will, you know, we'll, you know, it'll make life much more interesting through fiction. Convection. Picture. Picture continuing it to the journal, right? You know, guys, I put out the last issue of my journal mercifully this past December. They continuing a short form J C F now. We will take out an old article, reprint it and then append a comment very about its relevance to current issues like activist shareholders, for example, edge funds. What does Paul Singer, Vellie, management do for the world, you know, in spite of his, his is it wouldn't be great to have a book to activating these issues like about hedge funds and activist shareholders and private equity and private debt at this point in time. You think that would be something valuable or I hope my book already did it. You know, this to you too. I go back and read my chapter four. Yeah. I find that. Yeah. What we'll continuing with this debate to do. Don't you think you would do you think there's room for another for more. Well, absolutely. Yeah. And like that's that's the book I probably should write. And as this is in fact, I maybe I will write that instead of the instead of the other one. You know, write a book with me. That might be something I would think about. What talk about it? Okay. It's a great topic though. No, no, are activists and are activists shareholders good for society? Yes. I think that's a tremendously important. You know, I wrote my book coming back, but I wrote about a lot of companies and in every company almost this activist shareholder ends up playing a role. And I wasn't even a winner. And generally constructive role. Yeah. Well, not all. Right. But they come in Disney Pepsi. Verlabs out West Airlines. That's what I'm saying. Yeah. That's another company had a remarkable turnaround in the one you know, I think that I agree with you. When I look at some of these other attempts at turn around like Nike, I don't know if that's going anywhere Starbucks. I don't know if it's Southwest. I think it is an amazing. The Southwest really turned around. You look at the stats were in the Wall Street Journal about on time, what rival, which is considered a great stat and they were like on almost on top again. And it's it you're right. And I would, and I don't know if I would have really thought that was good when they started moving this. And anyhow, we should bring this to an end. The book is the making, maybe there'll be another book called that too and Marcus about these. Our activist shareholders, good for society. And you. Yeah. Okay. We got it. The book is the making of modern corporate finance, a history of ideas and how they help build the wealth of nations from Columbia University Press for listeners to think about strategy, governance and the social world of the corporation. It offers a rich match of how financial ideas have shaped the world and managed in today. Thank you all for listening to on the cast on the new book's network. If you have comments or suggestions, you can reach me at a Marcus at UAMN.edu. A Marcus at UAMN.edu. [Music]