Sign New York Banking Claim Easy

Industry sign banking new york claim myself

hi i'm tobias carlisle this is the acquirers podcast my special guest today is lawrence cunningham he's been a long time observer and a student of warren buffett and berkshire hathaway we'll be talking about his brand new book quality shareholders and his quality shareholder initiative it's an absolutely fascinating discussion i learned a lot it's coming up right after this tobias carlyle is the founder and principal of acquire's funds for regulatory reasons he will not discuss any of the acquirers funds on this podcast all opinions expressed by podcast participants are solely their own and do not reflect the opinions of acquires funds or affiliates for more information visit acquiresfunds.com well i just i just wanted to say what an absolute pleasure it is to be speaking to you first of all um i've been a long time fan of yours because i've got the i've got the original book uh that that you wrote uh the collation of uh buffett's essays this one is from 1997. um so you've had a very long-term interest in buffett and now you've got a new book called uh quality shareholders so can you just for folks who are not familiar with that term what how how do you define a quality shareholder and what's the relationship to buffer well it's a close relationship because i got the term from buffett he wrote in his 1978 letter that his goal at berkshire shareholder at berkshire hathaway was to attract the highest density of quality shareholders he called them high quality shareholders dropped the word high and then he defined them as long term and concentrate he wanted people who were going to hold forever and who were interested in the business and who would focus on the economics of the investments and acquisitions and the uh analytics of his own philosophy uh so he didn't want short-term people and he didn't want people who who bought everything indiscriminately and so that's the where it's where the phrase come from the connection is thanks for saying i've been studying warren and berkshire for a long time 25 years or so i've written a lot i've just i discover more and more things every year and the most important discovery of the past five was that warren's success in attracting that quality shareholder base was an important reason for berkshire's prosperity there are a lot of factors that go into warren and berkshire his intelligence his patience his discipline we can get into all those but one indispensable factor was his recruitment of that high quality shareholder base people who were patient they've held for that whole time and who were focused on berkshire so that's my most recent discovery and i think it's i think maybe the most important one yeah i love the i love the idea but what does what does having i think berkshire is two things berkshire i think tries to be a quality shareholder and berkshire also tries to attract quality shareholders so let's let's deal with the second part first what what advantage does it bring to a company to have quality shareholders on the on the register there are quite a number of them the most obvious is the horizon it gives managers a runway to execute on strategy if they don't need to deliver every quarter or every year they do have to eventually deliver this isn't a license for lethargy forever but they have some runway to develop that product search for that market find that acquisition execute on the strategy and and that's not a luxury many ceos have but i think most uh would welcome the second thing is it it promotes a degree of rationality in the stock price the volatility is is usually a product of short-term transient traders doing arbitrage things making trades that really are about value that has already been created rather than investments in the future of value creation uh and then when that volatility spreads even the indexers need to buy and sell and so you get wider swoons and swings there's greater departures between or wedges between the business value and the stock price at any given time the more quality shareholders a company has at its base the greater the leavening effect they have there's less volatility there's less trading for exploiting past value and more investment and patient value creation so that's useful in a couple i mean what i've said so far might sound theoretical it's practically relevant for the ceo who wants to use stock to make an acquisition that that currency is worth the most when it's most closely priced at value if it's highly inflated paying uh especially if the seller is going to join you where the sellers owners are going employees are going to join you there will be recriminations later if you've paid an inflated stock and obviously if you're paying for an acquisition with undervalued stock you're destroying capital for your shareholders so having a fairly valued stock is extremely advantageous for acquisitions likewise it's advantageous for paying employees if stock compensation is any important part of your pay package or indeed if you're trying to develop an owner culture so employees buy stock either just by encouragement or through some uh bonus mechanisms the best stock is the one that's that's fairly priced you're not being paid and inflated or deflated currency um so i can go on those are two big advantages i'll mention a third just since managers might be listening but these these are constructive engaged shareholders these are not sycophants or um or toadies or you know they they listen they pay attention and if you need them they'll talk to you and be constructive about it and so it's nice to have i call it a brain trust a ceo will very often like to know what it's most what's his or her most intelligent shareholders think and if you've got a a base a steady base a significant number of meaningful long-term holders they're your go-to people you can talk to them heck you can put them on your board of directors some of the best quality companies have done that including berkshire hathaway sandy goddessman is the most obvious tom murphy is another um and so and and the related point then is that when a short-term activist argues for a new strategic direction sometimes they're they're right but when it when the activists overzealous in unduly short term the ceo with a base of long-term focus shareholders can go to them and say d do you agree what they're trying to do here and tell me if you do we'll change course but if you don't will you help me persuade them that this is not the target they should hit and and that has been a i've got a article coming out where it just came out i got an article recently out in market watch explaining that use of of quality shareholders so those are those are three big reasons and the book identifies another half dozen and uh there's almost no downside what was the what was the market watch article what was the example that you gave in that i gave quite a few different examples and the inspiration was uh there's a new research article by some professors i know called validation capital they they observed in the past bunch of years companies have identified block holders who have validated managers strategic direction in a way that warded off uh activist holders so i i took from i said oh that's interesting because in this case so this came out um two weeks ago when this will air but i would say around february 20th or 15th the article came out it's called validation capital and and that inspired me to look back and think you know in the 1980s warren buffett was famous for among other things being a white squire that was a phrase during the battle the takeover battles of that era when a company would secure a large block holder who would be faithful uh supportive not a sycophant but just who would who would listen and ideally understand management's view and deter hostile bits that warren bought large stakes in convertible preferred stock of five or six different companies gillette solomon champion u.s air where he was aligned with the prevailing strategic direction and they they were aware that there were uh hostile bidders prowling and so he served a defensive purpose and so what i took from this validation capital is you know what there are a lot of quality shareholders today who provide a similar uh validation and uh the best example i had i've got a bunch of them in that in that column and they're in the book too was where about three years ago a company a chemical company ashland global was targeted by a relatively small activist but but they could be fierce even as small i think it was called cruiser capital i i think that was the one uh and uh and the board got the the letter the proposal they didn't think it sounded right and so they called their long-term concentrated shareholders and they had a bunch of them and the most the largest i guess and longest was newburger berman which is widely known to be a stock picker and a buy and hold type of firm and and ran the proposal by them and new burgers said no we agree with you and they contacted a few other long-term focused shareholders and and asked them the same questions and then they all agreed that this is not a good strategy so the board was able to tell the the bidder the insurgent good luck because you know our shareholder base is based is not interested and the fellow went quietly away and uh i give a couple another good example is uh ren ray um renaissance reinsurance which is a bermuda-based insurance company listed i think the new york stock exchange received an overture and it happened that at the time it was negotiating for an additional issuance of of common stock to state farm insurance also a revered quality shareholder most of its portfolio is long-term and concentrated and they had a five percent stake in ren ray they were negotiating for war and they upped their state they doubled their stakes so all of a sudden state farm owns 10 percent and they were quite supportive of the existing strategy rinway was also in the middle of negotiating the acquisition of a japanese insurance company called tokyo marine they had been planning to pay in cash but when this insurgent hit they said why don't we pay in stock you'll become a five percenter i forget the figure meaningful holder uh and they had had a long-term relationship with tokyo marines they knew they would be the kind of long-term focused shareholder that state farm had been and so on so all of a sudden they had 15 and two uh holders and they had a few others like that they were able to go back to the bidder and say we we we don't share your view and moreover lots of the shareholders don't either and so you know i just it gives it gives managers leverage just that's the i guess the third advantage to to a company and to a board an incumbent board that um especially in today's environment where activists have very loud megaphones they have amplified voice they've got a well-developed professional ecosystem of advisors employers bankers and funders and proxy advisors and their own shops have very talented uh players repeat players in this game and so if if you are targeted um it helps to have uh shareholders who who who you you can talk to who will listen to you uh many indexers are unavailable a lot of the time uh and and to again they're not sick of fans the newberger vermin isn't gonna just jump because some because some board says so but they will at least be a uh a sympathetic ear and maybe maybe a strong partner in supporting uh the board of management's case berkshire's had a run over the last 10 or 15 years where the stock price has underperformed a little bit and it's attracted some criticism and it has had several activists appear at meetings and try and ask various questions i don't think there was any ever any suggestion that um they were going to be able to achieve anything because buffett controls it and there are lots of other shareholders who are quality shareholders who've been there for a very long time you only need to go to a shareholder meeting and everybody will tell the first thing they'll tell you is how long they've held their shares so certainly people aren't trading it but doesn't that sort of seem to indicate that even with uh that kind of shareholder base you can see um you know compression in the in the in the price to the underlying value and it doesn't seem to insulate you from criticism you you still seem to face activists so how do you how do you square those two ideas yeah there there's no guarantee and certainly you know a persistently underperforming company may need to be shaken up i think there's a role for activism i think a lot of the activists ackman um you know even you know carl icahn some of the some of the tougher fighters in there they they have added value and and and helped change direction at a lot of companies so i i'm i'm not indeed activists investors can be quality shareholders bill ackman and and low that uh they very often have very long holding periods and and and quite concentrated portfolios so these are the opposite of indexers and transients uh the the there is a different category or some of those those guys can sometimes occupy what looks to me like a much more short-term uh strategy or just get overzealous in something where they they they cling to a strategy idea that actually doesn't make sense and they're just you know suffer from ordinary behavioral biases and it's that overzealous cohort that i worry about and for whom i think a cohort of quality shareholders can be particularly helpful but a persistently underperforming company has a problem and needs to change i think in the case of berkshire and buffett i you know i think their run is uh spectacular so spectacular for a decade upon decade that when you look at the past 10 you say well that's not so spectacular anymore or even the prior 10 is nothing like what it was in the 70s or 80s and there's a couple of reasons one is obviously they get bigger and bigger it's harder to outperform it's harder to find opportunities to allocate 30 or 40 50 billion dollars at a time i've only found a couple so that's that's a big problem and then you also end up needing to uh invest in businesses that require capital and so you're sort of against the contemporary curve a little bit you know buying a railway buying energy businesses um when when most operations are moving to intangible assets you're you're bulking up so i think it's a victim of its own success in some ways that said it's it's it's not as if it is hemorrhaging cash uh it's accumulating abundant amounts of it uh and and managing to perform at least as well as the index so uh you know i'm i now on the on the agitators there there have always been agitators at berkshire for for 30 40 years uh one cohort argued that the company must pay a dividend it hasn't paid once since 1968 or 72 whenever it was uh you know warren's joking on that one he said i must during that board meeting i must have gone out to the bathroom when they when they passed that resolution but um now and we're talking incidentally the friday before the saturday when the letter comes out and there is some rumor in mumbling and so on about well maybe he's going to finally announce dividend i we'll see i the record uh suggests he's not uh and he's got 130 or 40 or 50 billion i don't know what it is so but for 30 years a cohort is agitated to pay a dividend they don't like that strategy now what he's done on two occasions is take a poll of the shareholders the non-buffett shareholders and an overwhelming majority of that cohort said no please keep the funds plea please reinvest them and and they seem still to be happy with that even though they're reinvesting them in treasuries at the moment uh the more recent agitation in the past dozen years has been the bad wagon against conglomerates the argument that you've got 80 different businesses in every artery of commerce manufacturing you can't possibly understand all those things they can't possibly be adding value synergies you really should start busting up selling them off and the answer is manifold but the first answer is uh there are extraordinary gains synergistic gains from being inside the berkshire umbrella the vendors pitch their products to berkshire subsidiaries at a huge discount ibm has has cultivated their data process their their their financial accounting systems and and data analytics and they give individual subs a discount uh and there are lots of other vendors who do that moreover the commitment to permanence that berkshire has always made that is we don't bust up the company we don't sell off divisions so long as they're generating some cash and don't have any labor unrest we've had a couple of sales we've sold off the newspaper businesses because they're hemorrhaging cash sold a small insurance company because it was a it was it was um cannibalistic we were two two berkshire subsidiaries in the same business didn't make sense really to own them both and there was no way to combine them so he sold a couple but the main idea is that when you sell to berkshire you've got a permanent home and so long as you're doing okay we're not going to sell you that has appealed to a lot of businesses seeking a that kind of commitment that kind of permanence family businesses that want to maintain that legacy entrepreneurs who who want the the runway and the the ability the agility to do their do their thing and that has added significant value to berkshire so and i i think that that policy remains important even though we haven't made a lot of acquisitions in the last five or eight years the ones the ones that we've made uh have have have i think been helped by that commitment i mean when i did research for an earlier book i interviewed a lot of the selling families and so many of them said we took a lower price from berkshire compared to rival bids or market fair value because we put a a price we put a uh we put a um a quantity on that uh intangible commitment so it's it's saved berkshire it's been an important part of the value proposition of berkshire and so if you said hey you know what let's just start selling things off that would be the end of there'd be no it's it'll be the end of the road and and maybe someday that you'll be at the end of the road but i don't think we're near there yet i'm glad you raised some of the activists earlier because i think that there's there's been an evolution in activism or maybe it's the activists who survived have have tended to become a little bit more in gay perhaps they're more engaged shareholders than the activists that we saw in the early 2000s or the the corporate raiders from the 80s and i'd include in that list that you gave before uh starboard and and value act uh i'm not sure they're continuing on anymore but but value act was certainly like that where they were very long-term shareholders which is in total contra distinction to the way that they're sort of perceived as being very short-term shareholders and and then for a quick pop they tend to hold and seek to make operational changes you talk a little bit about engagement as shareholders do you can quality shareholders be engaged shareholders who can affect change or is that not their role oh they they sometimes do and you're absolutely right on that you know dan loeb is is particularly good at engaging and and companies with whom with which he's engaged have engaged in return a couple years ago he signaled to microsoft that he had some ideas and they responded by putting them on the board or reporting you know inviting him in and i think they got a designee of his so the activists are many of them anyway or see that's much more valuable to everybody to engage than to fight and and plenty of boards are uh appreciate that that too so i i do think it's um uh it's a it's possible and it's favorable uh moral within the second part of your question within the the non-act the traditionally non-activist quality shareholder community there certainly are times when a long-term focused shareholder is frustrated with strategic direction or a particular major decision and tries the traditional routes of quiet diplomacy and cajoling the ceo or working with the cfo or calling a board member or something like that but still don't get anywhere and in some cases you the old-fashioned thing to do was to sell they used to call that the wall street rule disaffected shareholders can simply sell their stock and move on but for some quality shareholders in particular the stakes are so high the positions that they hold are so high that unwinding them would take a significant period of time and maybe even some cost and so that's not a realistic option i give an example in the book of um of uh methanex a um a canadian that one of the largest ethanol manufacturers in in the world and and one of their longest uh shareholders i think it was 12 years uh maybe a 16 stake or something like that uh objected to a imminent decision they were going to build a a huge new plant ethanol a plant in louisiana at a huge cost they're going to borrow a substantial portion of the development price and they were going to do this alone they didn't they didn't have a partner and this quality shareholder didn't think that was a prudent approach a lot of leverage a lot of risk why not get a partner why let's let's let's think this through and the board told the the shareholder to sell said look this is what we're going to do the show said yeah i think it was a 16 position or something like that it would it would have taken you can't just sell that tomorrow um if the float won't support it it's just chaotic so they went hostile in that sense they they tried they exhausted all possible discussions and finally announced a slate of directors for the next annual meeting for four directors and that got the board's attention they eventually settled as most of these things do uh with one or two of the slate on the board and they they did a whole review of the investment and and and so on it eventually reached some sort of accommodation yeah so i i mean i think that quality shareholders have different temperaments they're you know they're they don't this is not a one-of-a-kind thing again the the core definitional elements are long horizons at long holding periods long empirically long average holding periods and and relatively high portfolio concentrations that is their active share is is large above 90 or something like that and you could define these things in different ways but beyond that temperaments vary and some are very highly diplomatic like warren and and others are a little more would be public like dan loeb or or bill ackman and uh and uh so i i think that that every shareholder every intelligent shareholder knows that there will be times when management needs a tap on the shoulder or a board is is supine and needs needs awakening and um and i think people will pursue that need or make that tap you know in different ways uh but wouldn't that that wouldn't necessarily make them um you know knock them out that's a quality category much of the book is about the action that management can take to attract quality shareholders and the advantages of having quality shareholders uh on your register are there any advantages to being a quality shareholder and what are they perhaps yes you know this is an ongoing research project of which the book is a significant part the the broader research project investigates the performance of quality shareholders as well as portfolios of high high density quality shareholder companies and what we we see on both sides is outperformance and let me just break that down a little bit with and and adds hastily add some qualifications on the investor side as your listeners undoubtedly know and as as you know a raging debate contests whether any active strategy can systematically outperform a passive strategy the active passive debate uh it's been going on for since index funds were proliferated in the late 80s or 90s and uh it has uh a lot of empirical scholarly work around it and also more uh disputatious uh you know fights among different investors out there and uh even a bet a famous bet that warren buffett made against ted cites um and uh and i think the the general evidence may they seem to suggest that the passives won that there is no uh active strategy that can be proven systematically to have a propensity to outperform but there's a huge caveat to that which is the strategy of the quality shareholder and work by martine cramers in particular from the university of notre dame and others following the approach uh demonstrates that a strategy of patient focused investing can systematically outperform and the theory i mean i think it's sort of a logical theory that if you're quite careful in your selections you've got a rigorous approach to not only financial analytics evaluation and so on as a value investor might but also an appreciation of characteristics that signal uh competitive advantages durable moats um a conviction that uh is is logically appealing to a long-term investor why uh it might be that if you pick 7 or nine or fourteen of those rather than a thousand off of the s p then you might outperform and and and so there there is empirical academic evidence that suggests that this strategy a quality shareholder strategy uh has the uh capacity for systematic outperformance it's not a guarantee you still uh you could you can use the filter such as this uh and then still come up with uh with uh errors selection problems and so on so but but there is a a an intellectual academic case that this uh this methodology this approach does have this capacity so that's on the on the investor side and then you look down investor lists you look down the list of investors and that i identify as um high on a quality shuttle or list they've got strong such records including you i said i should say um and then on the other side on the company side what we did in the research that's beyond the book if it's available on online if you search for from my name uh in the research i can give it to you later but uh there it's it's called the research on the quality shareholder initiative and what we did in there is um we we rank 200 2070 uh companies i i think it's u.s there may be some canadians in there by the their propensity to attract high quality shareholders in high density and then just did an experiment imagined a portfolio of the top 60 in a portfolio of the bottom 60 over the prior five years and the top 60 significantly outperformed i think by 200 basis points a full two percentage points out performance uh and then within that 60 the overwhelming portion out had outperformed there were there were some laggers but it was a significant uh outperformance and and so uh it's one data point it's one study it's one metric but it's a it's a reasonable basis and again reasonable basis for believing that the companies that attract quality shareholders may well outperform we don't make any assertions about causation i don't have a claim that says that if you attract quality shareholders you do better or if you do better you attract quality shareholders but i think i think there are some what we then do with the data is we go around and try to figure out well why do these companies tend to attract these these holders and so we looked at look at 40 different practices companies might or might not follow to see if there's any correlation such as some of the examples that we've looked at or direct or ownership of the stock attendance at shareholder meetings uh rankings of the clarity and candor shareholder letters uh degree of sophistication and achievement around capital allocation and a bunch of others we've looked at about 40 uh and and then we and we we see correlations among the ones i've just mentioned um and we can incidentally we also find some interesting practices where there's no correlation and this includes staggered boards and dual class stock two hot button issues in the governance world that our evidence shows there's no correlation so company with or without either of these things doesn't have a higher or lower uh density of quality shareholders just a random distribution and our inference from that is these are not something these are not policy practices that quality shareholders rank as always good or always bad they take each one on a case-by-case basis for some companies a staggered board is a terrible idea for others it's it's quite productive and useful so we get into some of that in the book um so we then make some inferences around some of these examples about causation i don't want to push this too hard but i'll just give you one example where we found that companies whose board has higher levels of director ownership in the stock tend to attract higher levels of quality shareholders and again i don't want to insist on causation but here's at least a story about it well these directors are probably acting much more like venture capitalists that is they're actually helping develop and implement strategy a conventional board member today will very often instead be there to promote uh compliance and assure the the auditing is is fair and to conduct governance surveys or check the s the ceo's um uh decision making and so on but but a director that who's who has a significant uh part of her net worth in the company may do more made really try to engage with the ceo with strategy you know how are we allocating capital what's our hurdle rate should it differ for larger small acquisitions you know really get in there and do what what venture capitalists do which is really it's not telling the ceo what to do but coaching and and nurturing and and really caring about the um return on invested capital let's say and so that's our hypothesis so our thought was you know if a equality shareholder seeing that kind of board is is very likely to be attracted to it and a c and a director who has that kind of stake is very likely to have that that additional commitment uh and so it's it's not merely a correlation it's something quality shareholders are looking for and something that if a company does it will attract them uh that's a thesis again i don't want to push it too hard but i think that that's kind of what we're doing when we look around and see what practices tend to correlate and uh and uh so you know the reader will have to decide for herself but we're trying to keep the research up to date on the on the internet so that people can follow along you've had a long uh interest in berkshire and buffett and you're an academic you're a professor how do you characterize your body of research or your research focus yeah the intersection of investing in management and uh sort of a venn diagram there i guess in a way and then it's the the other that's maybe the horizontal the vertical is the is governance that's the venn diagram around governance so it's business and law so that that sweet spot right right there in the center is really where warren has been living his life that he since since he started writing his letters he's thought very hard about how to be a good investor and how to be a good manager you mentioned earlier that berkshire hathaway is both a quality shareholder of other companies and one and attracts quality shareholders to it that's because warren is the is ultimately both an investor and a manager and so it's neat to study him because you see both parts of that equation you know a lot of companies that the ceo doesn't really have the investor experience or the s mister viewpoint or harder for that person to to get what i'm talking about or to understand things from the shareholder side and likewise there are a lot of investors there's never who've never managed a company uh and it may be harder for them to appreciate the challenges so it's really neat to illuminate that that intersection and so that's an important part of what attracts me to berkshire and there are other companies like that especially in the insurance sector you'll find more companies that succeed in attracting quality shareholders in the insurance sector than any other and it's partly because those managers are also investors they have enormous amounts of float typically that they have to invest in a portfolio typically first particularly one that includes bonds but also equities and so so that intersection is between investing and management very interesting to me and then the governance piece i'm a law professor by background would focus on on business and governance and what boards do how they can do it bett r uh you know overseeing companies and that sort of thing and so i spent a lot of time thinking about this relationship and i've got uh well-formed views around what i think the ideal mix is and to shorten shorten it for you i i think that it's much more ball doesn't a better service of society when it simply creates lots of flexibility some some guardrails and some boundaries and then lets individuals make decisions within that that's especially true i think in corporate governance and so i i'm skeptical of very specific rules that require every board to do this that the other thing and that would be you know say not allowing a staggered board allowing dual class stop requiring a certain number of directors or a certain committee type uh or a certain balance of gender or balance of race or separating the ceo and and board chair i'm sure your readers are familiar with the list of topics where uh there are some governance devotees who believe there is only one right way to do it and others i mean this other group who believes that there are many different approaches and that the right one will be buried by company and i'm so very interested in that so my that's the two venn diagrams if you like there used to be the this principle of business judgment decisions sort of being outside the um review of of law courts and it seems that as we've progressed over the last decade or so they've become increasingly you must check all of these boxes and if anything i think that that sort of made the corporate governance a little bit worse because people are so focused on checking the boxes then they're able to sort of sneak through a whole lot of other stuff where previously he sort of had to take it in his totality and look at what they were seeking to achieve do you do you see any any of that do you see does that is that a fair characterization do you think i'm troubled by the uh thank you very much and i i um i would uh make this observation that i think that the business judgment rule which is what you that first described uh is a doctrine in law courts of of deference so that a judge asked to just to evaluate or review a board of directors decision about dividend policy or or a divestiture or a spin-off or so a tracking stock or whether this person should be hired or fi those business decisions have classically been be seen been seen as outside the competence of a lawyer of a judge and rightly so because it's those are quintessential business decisions they must be made in real time with lots of contending pressures and so it's best to have those decided in a board room rather than a courtroom and so judges for hundreds of years from england to australia india uh israel and the us and canada have said uh that's a business judgment and the rule is don't second-guess it now i i think that that legal standard is is still alive and well i think what's happened and this is where i think it's disturbing because the second half what you described is this proliferation of of prescriptive governance of saying you you must do this that or the other thing or you may not do this and the other thing includes the examples i gave staggered boards have declined precipitously separating the chairman and the ceo is a very popular thing there's been enormous criticism against dual class and we could have a list and and indeed if you go out where is this coming from it's actually not so much coming from law courts it's it's coming mostly from the passive indexing community and that includes the big investors there blackrock state street vanguard and especially includes the two big advisory firms institutional shareholder services and last lewis all five of which are in effect either managing or over or examining uh many many thousands of companies trillions of dollars in assets deployed in tens of thousands of companies around the world and it is their business model the three big indexers in particular but then the clients of the two advisors their business model is to exercise no judgment in investing that we we buy every stock in the basket we do have to make sure we keep up with the basket and have a program to buy and sell as things change but we're not deciding berkshire is appealing at this price microsoft is is wobbly these days salesforce is the future they're not making judgments about that at all they're buying the s p 500 or the russell 3000 or the the the dow or whatever it is but then they're asked to vote on a whole bunch of things they're asked to vote at berkshire's annual meeting and microsoft spin off and uh and so on uh and they they simply lack there's there's no budget in their business model to evaluate these things now what a big deal comes along you know dell is selling off you know dell is going private well yeah they'll they'll put a few people on that deal and look and see the economics are we receiving a good price should we report this should we support this this this this going private but for most things they they cannot possibly study is the staggered board good at boeing uh is the dual class stock good at the at the new york times company they they can't do that so just as a practical matter and so that they've instead migrated to have it well we've got generalized rules and state rules and requirements that we have just determined to be the best practice and so unless we have some contrary evidence that's how we will vote or we recommend our clients will vote and so that's that's i think the principal source of the the rule orientation now or around governance it's it's a simple product of a business model now in their defense what they would counter me say well no we we're not doing this simply because it's efficient or cost effective because we lack a budget we actually look at systematic empirical data about what is best and we look at academic research we look at your research and we've seen it in general and we look at logic too as a general matter separating the chair and ceo function is smart is is natural because the board's job is to hire that ceo and then overseer and so you can't have the guy doing the same thing so so you know they'll have an argument that there's a logic and even an empirical basis for a lot of their assertions i simply take a different view and i think that they're i i'll agree this much i'll say look you may have identified best practices but that that's that means that they're best for some sizable cohort maybe it's a majority might even be three-fourths but it it admits that it's not right for for lots of them there are plenty of companies bank of america it's it's far better off having brian moynihan have both of those roles because it's you it's efficient it's it's useful to have the person in charge of the company also also running the board and setting the agenda why well in part because he's trustworthy and and really has a good view of things in part because the other directors are really strong and they're not going to let him get away they're not supine uh ornaments and fixtures that's a good board and that's how i would decide i'd say well who is this person and who are the other people there in that room but it's not feasible for iss to look at ten thousand companies and say well is this really brian moynihan here are we looking at a a you know a mono maniacal nut you know so so i just i think that's where it is toby i think it's it's not so much that law is certainly not corporate laws judges still regard their uh bailiwick as law and not business but it's it's ironic almost in a way that the governance gurus the investor large part of the investor community have decided to do something different i mean the law judges were basically saying let a thousand flowers bloom there may be lots of different good ways to do this and we simply don't know so we'll leave it up to the boards and oddly enough the governance community has uh elected to impose a very specific a fairly specific set of expectations or requirements in corporate life that the judges had the wisdom to say ought to vary a lot more than it does i think one of the difficulties with glass lewis and ess is that they almost always support incumbent they always always support the management the incumbent management and there's not much of a i don't know how much consideration they give of the activist sort of role and i've seen many instances where i thought that the activist was probably in the right and both the asses and glasses and it's a very heavy kind of stamp that they're able to put on these things it's like a third party has this disinterested third party who only has your best interest as a shareholder has reviewed this and they've decided that we're going to support management but then i don't know how many there are many small shareholders out there who rely on that advice almost exclusively without realizing that that's what they always do do you have any view on on sort of why they behave that way is it sort of that is it sort of uh you know it's helpful to get the next job if you've if you've supported management well thanks it's a it's a serious problem and that is one of the pr one of the reasons potentially we we see conflicts of interest among the big indexers any and even among the prop those proxy advisors that they will um they're they're not they're not pure independent objective observers they they have other relationships with companies or prospective relationships with companies that might be important to them and and that may enter into their judgment now they will all respond to that criticism by saying we have very uh thick walls between these different activities within our firm and so that's not a problem isolated that but another problem is uh and i'll add one one statistical observation is that there has been a slight increased propensity of those indexers and and the advisors to break with management and so you're right that historically there has been uh you know if you you look at the voting outcomes and large numbers there's been a tendency of the passives to support management and the actives to support uh proponents of shareholders not just on activist campaigns but on shareholder proposals around emissions or other other sorts of things so there has been that that divide or that that differing propensity it's it's starting to change a little bit you're starting to see some some indexers say well no we're we're against this just just ever so slightly and i take that and partly to be a response to the criticism that you just referenced it is a small part that i said that they're trying to increase their budgets to look at the big deals to to look at dell going private or or this or that merger and and when they sit down and analyze they say oh wait a second this is not we're not going to go along with this but i've got a different idea i'm thrilled to share it i i vetted i put this out in the market watch home just a couple weeks ago too and because what i'd like to see is because right now the way i've just described it is the the indexers lack a sufficient budget to investigate all the all the votes and even if they have enough of a budget to get most of the important votes there's still a lot of votes where they're they're probably not rendering the optimal decision they certainly lack the optimal information base on the other hand the active shareholders especially my quality shareholders but really even the day traders and the arbs and so on um have the incentive to study and see especially the orbs in a merger transaction who you know buy us buy the stock from the quality shareholders and then get the vote on the merger those people are have the incentives to become informed and have the information set and so there's at least a reasonable chance to suppose that the active share cohorts vote is a higher quality vote let's say than the indexers at least at least the possibility of this and so what would if that's true then what would be nice is is if the indexers could become aware of the of the of the likely vote of the active cohorts before the indexers have to cast their vote and indexers could ignore whatever the active investors think uh but it would be it could be helpful to them to say well here's our standard matrix and and we have looked at we've had one person look at this and we think yes but let's let's see what uh new burger berman let's let's see what tobias carlisle uh is is likely to do on this let's look at fidelity or t row price or the other uh famous uh active shareholders who who try to look and study and so we develop we patented a product actually it's like just proxy plumbing in effect that would enable those active voters to release their intended vote before they have to cast that's a great idea yeah and just so and then so we we just have we just you know hook it up to their you know we don't even need to be involved in just all those vote we publish it you know here's what tobias and we're not soliciting we're not doing anything so we don't have to be regulated or anything and the indexers don't have to they can ignore it well we don't really care because we've got our matrix or we made our judgment and we know what we're doing or they could say well gosh that's really interesting that uh and so we're hoping to create you know we've got the technology we we think we can do it and so that if any listeners are interested in just reading a little more again my market watch column from perhaps around late early february or january has the a little more of the details on that that's a really simple elegant solution to the problem that's that's a great idea we should implement that 100 percent thank you very much tell everybody uh larry we're coming up on time uh if uh if folks want to follow along with what you're doing or find the book would you let them know how they can do that yeah i think the best way to get access to everything i'm up to is the quality shareholder initiative i think if you put that phrase in a google boom it'll come right up to my my page that includes all the all the all the research around this topic links to the book and other materials much much of which is free and a list of all the market watch columns incidentally where i talk about those these topics once a week lawrence cunningham thank you very much thank you very much [Music]