Governance is an issue I touch upon in many courses, from Advanced Corporate Finance to Impact investing to Microfinance. Devin Salmon ’18 expressed interest in understanding the pressures that businesses are facing from their investors and how they are affecting business strategy and performance. He came across a NYT DEALBOOK conference devoted to this topic in the Fall. Haverford MI3 sponsored him to attend and below are some of his notes and thoughts on what he heard. – Professor Mudd
(Devin is 3rd from the left above, with Nimesh Ghimire (Swat ’15), Layne Cole (BMC ’16) and Ananya Kumar (HC ’18) at the Investment Advisory Council Due Diligence Presentations in December 2015.)
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DealB%k Ticket!
Devin Salmon on the NYT Dealbook Conference
The New York Times Dealbook Conference in New York City was hosted by Andrew Ross Sorkin, NYT Journalist, CNBC host and author of Too Big Too Fail. It had a plethora of guests and speakers ranging from CEOs of Fortune 500 companies to investors, entrepreneurs, and politicians. The wide array of views spoke on the need for long term thinking in a world that is ever changing and demands an immediate result. An example of the short term thinking is shown in Peter Lynch’s fund, the Magellen Fund. The fund returned on average 20% per year but the investors on average made 0%. The reason for this is because whenever the returns were rocky they would pull out their money, and after a good year they would put it back in. Unfortunately for them, the average investor missed out on the fund’s strongest years because they were usually immediately after the decline. Al Gore, the former Vice President, said that the average stock 40 yrs ago was held from 6-7 years, and now the average is only 17 weeks if you don’t include algorithm funds and ETFS, and if you include them it is 27 days.
Investors such as Carl Icahn and Stanley Druckenmiller spoke on the increasing trend for companies to initiate buybacks on their own stocks, even when the company’s stock is trading at all time highs. The companies are not as profitable due to higher regulation and increasing competition, so they initiate buybacks to make their earnings per share (EPS) look higher. The institutions are doing this to appease the analysts and traders in the short term, but it is an issue for the long term. Because the companies are buying back their own stock instead of investing in research and development (R&D) and their own business, the companies are not becoming more efficient. Larry Fink of Blackrock and Gary Cohn of Goldman Sachs want a change in tax structure to incentivize firms to think more long term; Fink would like for the government to impose a structure that rewards those who invest for over 5 or 10 years. He believes that in turn, the companies will be able to focus on the long term and not be forced to make decisions that will hinder the growth of the company.
Netflix CEO Reed Hastings tries to focus on the long term because “if you focus on the short term you will chase your own tail and fail”. He believes in the long term business plan, and that a CEO should not care for the stock price in the short term. Muhtar Kent, CEO of Coca Cola, and Gary Cohn want long term values because it will better allow them to balance, cut costs, and reinvest into the business.
After listening to speakers from such accomplished backgrounds, I felt that they all were speaking of similar issues and desires. They all understand that for a company to be successful it must invest in itself and in the future. But, they are all pressured by the short term investors and analysts that force them to meet high expectations in the short run for quick profit. Many companies are losing their competitive edges because they are pushing up the stock price and not helping the company grow or become more efficient. Carl Icahn highlighted the fact that many of the companies are not being run well, and that their future will be hurt because of their actions today.
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When I asked Devin whether he was more hopeful or more concerned leaving the conference, he replied “concerned.” Apparently, the conference was long on description and short on prescription. And the prescription… perhaps I should not be surprised… lower taxes.
OK, I should not be so cynical. It was more nuanced than that. The proposal was for government to lower taxes on capital gains for assets that are held longer. (I wonder, did they consider suggesting a rise in capital gains taxes for assets held for only a short period?)
Anyway, thanks to Devin for sharing his takeaways with us!