Money Stuff

Uber CEOs and Shareholder Welfare

Also the 10-year crisis anniversary, some Shkreli, blockchain, unicorns and buybacks.


On Friday we talked about reports that Uber Technologies Inc.'s shortlist of potential chief executive officers was down to "fewer than six candidates," which is a funny way to say "five." But that list included Meg Whitman of Hewlett Packard Enterprise Co., who quite publicly turned Uber down, leaving four candidates. I suggested that one of the final four might be Travis Kalanick, Uber's recently ousted CEO, but that was mostly a joke. He just resigned a month ago under heavy board pressure, kicking off the current CEO search. He can't come back immediately as his own replacement. That would be too weird, even for Uber.

Ha no kidding nothing is too weird for Uber:

He and several of his allies had a competing agenda that included their own preferred candidates for the top job and the possibility of returning Mr. Kalanick into an operational role, perhaps even as chief executive. His surrogates had also recently begun talks with the Japanese conglomerate SoftBank about an investment in Uber that could provide Mr. Kalanick a route to regaining power.

"Some company executives are concerned that Mr. Kalanick could use a SoftBank investment to dilute other shareholders’ stakes while he continues to buy stock back from employees in a bid to amass power." One big task for the next CEO will be to prepare to take Uber public, and if that next CEO is in fact Kalanick -- and if he gets that job by engineering a series of transactions to give himself voting control -- then that will be a pretty weird initial public offering. It is one thing for tech visionaries to take their companies public with shareholder-unfriendly voting policies on the theory that Mark Zuckerberg or whoever can do no wrong. But Kalanick has already been forced out in a boardroom coup; why would anyone want to buy nonvoting stock in an Uber IPO? And, conversely: Kalanick has already been forced out in a boardroom coup; if he gets back in, why would he want to sell voting stock in an Uber IPO? "Given that Uber has $5.5 billion in cash on hand" and that SoftBank seems happy to give it more money in a deal that would consolidate Kalanick's power, why do an IPO at all?

Of course there are still other names on that shortlist, presumably names of people who would be more conventional public-company CEOs, though the specter of Kalanick looms over anyone who might take the job. Kara Swisher spoke to several people who had been contacted about the CEO job:

What’s the biggest problem at Uber? I asked.

“Travis,” said one

“Oh, Travis,” said another.

“Man, he’s brilliant and so important, but who wants to deal with Travis?” said yet another.

I hope that last quote was Kalanick himself, trying to talk down the job (and talk up himself!) so no one else will take it. Swisher also reports:

Since he left, Kalanick has told numerous people, including at least one job candidate, that he was “Steve Jobs-ing it,” an apparent reference to the purge and later return of the legendary Apple founder at the company.

Yes but Jobs took 12 years to get his job back at Apple. Kalanick seems to want to do it in two months.

What should corporations do?

There is a popular theory that a corporation is owned by its shareholders, and that the job of the corporation is to maximize the value of its stock for the benefit of those shareholders. This theory is a useful shorthand, but not quite right, and people disagree with each part of it in various combinations. Perhaps the shareholders don't own the corporation, and its job is not to maximize their wealth. (This, loosely, is the notion of "stakeholders.") Or perhaps the shareholders don't own the corporation, but its job is to maximize their wealth. (This, loosely, is the notion of "director primacy.")

Or perhaps the shareholders do own the corporation, but its job is not to maximize their wealth. What would its job be, then? Oliver Hart of Harvard and Luigi Zingales of the University of Chicago answer: "Companies Should Maximize Shareholder Welfare Not Market Value." Shareholders, they argue, care about more than stock prices:

The ultimate shareholders of a company (in the case of institutional investors, those who invest in the institutions) are ordinary people who in their daily lives are concerned about money, but not just about money. They have ethical and social concerns. ... Not only do shareholders give to charity, something Friedman discusses at length, but they also internalize externalities to some extent. For example, someone might buy an electric car rather than a gas guzzler because he or she is concerned about pollution or global warming; she might use less water in her house or garden than is privately optimal because water is a scarce good; she might buy fair trade coffee even though it is more expensive and no better than regular coffee; she might buy chicken from a free range farm rather than from a factory farm; etc. As another example, many owners of privately-held firms appear to care about the welfare of their workers beyond what profit maximization would require.

However, if consumers and owners of private companies take social factors into account and internalize externalities in their own behavior, why would they not want the public companies they invest in to do the same?

One well-known answer is: Well, because that would be complicated. If you want to maximize shareholder wealth, that is a relatively easy goal to measure: You tell managers to try to make the stock price go up, and then you reward them if the stock price goes up.  If you want to maximize shareholder welfare, you don't really have a number that you can look at to see if it's working: Different shareholders make different and often inarticulate tradeoffs between money and other social goals, and your shareholders are constantly changing anyway as they buy and sell stock. Different people have different preferences for free-range chicken, but everyone prefers a $21 stock to a $20 stock.

Hart and Zingales know this, and discuss some mechanisms for aligning companies with shareholders' social goals. They settle on asking shareholders to vote on "matters of policy," which doesn't seem like a particularly practical solution. (It works in a stylized model in which the company makes a one-time choice of "clean" or "dirty," but not for a real company that is constantly considering tiny tradeoffs between profits and a whole range of social concerns.) And they mention the "amoral drift" that pushes companies, even those that want to be good, to maximize profits instead: If you are sacrificing profits to be good, then someone else could make more profits by being bad, and can offer a premium to buy your company and do so.

Still there is a sense in which this perspective is obviously right and useful. If you happen to know that your shareholders want something other than stock-price maximization, you should give it to them, or at least have a reason not to give it to them. Sometimes this is environmental and social stuff: Shareholders like money, but they also prefer not to live underwater, so you should try not to contribute too much to climate change. Some of it is symbolic governance stuff: If your shareholders really like the feeling of respect and empowerment that they get from, say, being able to vote on executive-compensation matters, then you should let them vote on that stuff, even if it has no practical connection to maximizing the value of their stock. 

And some of it is wealth maximization, but not by maximizing your own stock price. So for instance if your shareholders are union pension funds, you might want to adopt union-friendly policies because that will make your shareholders richer as union members rather than as shareholders. Or one that we talk about a lot is: Your shareholders are diversified. They are (ultimate investors in) large diversified mutual funds that own stock in lots of companies, including your competitors. Doing something that raises your stock-market value by $1 million, but that reduces your competitors' value by $2 million, seems good for you, but is probably bad for your shareholders' overall wealth. (You can think of this as "slashing prices to compete with companies also owned by your shareholders," or you can think of it as "demanding a higher takeover premium from a buyer also owned by your shareholders," or whatever.) Often we talk about this in terms of large institutional mutual-fund firms that own lots of shares in lots of different companies, but really the largeness doesn't enter into it: If a company's shareholders are five large diversified mutual-fund firms, or if they are a million small but diversified retail investors, then either way the company might think about maximizing their overall wealth rather than maximizing its own stock price.

Elsewhere: "Benefit Corporations and Public Markets."

Crisis anniversary.

Today is the 10th anniversary of the day that the Bear Stearns High-Grade Structured Credit Strategies Master Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Master Fund filed for bankruptcy, which is as plausible a starting date for the global financial crisis as anything else, so: Happy 10th anniversary, Global Financial Crisis!

Doesn't it feel like just yesterday? In general it is a true and useful cliché that financial markets have very short memories, but the 2007-2009 crisis really has hung over everything in finance over the last decade. Perhaps we are turning a corner now. It's still hanging over Citigroup and Bank of America though:

After banks worldwide lost $2 trillion and received $700 billion of bailout money, the six largest in the U.S. are making almost as much as they did in 2007. But they haven’t all been rewarded the same. Those that took the biggest government bailouts -- Citigroup Inc. and Bank of America Corp. -- are still way below where their shares traded the day the canary died.

Meanwhile in Europe: "At Long Last, Europe’s Banks Are Stabilizing."

How's Martin Shkreli doing?

This is a story about Martin Shkreli, his lawyer Evan Greebel, and an investor in his company named Tim Pierotti who was apparently selling down his stock:

“I think it might be tim selling,” Mr. Shkreli emailed Mr. Greebel on Saturday, Dec. 28. Things between Mr. Pierotti and Mr. Shkreli had soured by then. Mr. Greebel did not seem to care; he had not been paid by Mr. Shkreli, and asked for money by Monday. “Zero chance,” Mr. Shkreli replied. “what to do regarding tim?”

“not sure what you can do; he has the stock,” Mr. Greebel replied.

You have to admire, a little bit, Shkreli's management style. You or I might have promised to come up with the money later, or at least apologized for not having it, before politely requesting more legal advice. Shkreli was blunt and to the point: I'm not paying you, and you're going to keep working for me. It seems to have worked, a little, though the advice he got wasn't what he wanted. But if he'd communicated with his investors like that, he probably wouldn't be on trial now. Anyway, the jury starts deliberating today.

Blockchain blockchain blockchain.

Here is an excellent Twitter thread from Jon Stokes of Ars Technica (slightly edited for this format):

Stop me if you've heard this one before: A cohort of young nerds believes they've hit on the solution to a Big Problem and it involves code. They haven't read much history (and have lived even less of it), but they've figured this thing out. Stand back olds, we got this. 

So they build something new. It really is new and important, and the bandwagon grows and likeminded believers join in. Then the bros come in because they smell money. And the lawyers and the bankers. They former don't understand it but can sell it, and the latter actually understand it better than the original nerds, who think they're doing A but are really enabling a new twist on C. Because bankers and lawyers are better able to place this new thing in the context of things that exist and have existed for a long time. Their role is to figure out how to make this new thing end up just like the old things, except even better for the incumbents.

And in the end they win, because the incumbents always win. Maybe not specific incumbents, but incumbents as class. The new thing is a lot like the old thing, except worse because it's more powerful and opens new vistas of asymmetry for the incumbents. When you build something powerful, the powerful are always in a better position to bend it toward the end of increasing their power. Always.

I am not sure that this framework is always exactly correct -- does it describe Google? -- but it is useful, and it seems to pretty well describe blockchains in finance: Once people talked about the blockchain as a way to get rid of banks; now it is mostly a way for banks to consolidate their power. If all of finance runs on permissioned blockchains set up by consortia of banks, then you'll need to ask a bank for permission to get on the blockchain.

Really, though, "Bankers and lawyers are better able to place this new thing in the context of things that exist and have existed for a long time" is a good creed for bankers and lawyers. Bankers and lawyers are the masters of the lore, the keepers of the collective memory of a financialized society. The job of the cryptocurrency revolutionaries is to re-learn all of the old lessons of modern finance, one at a time, in public, in embarrassing ways. The job of the bankers and lawyers is to already know those lessons, chuckle quietly at the cryptocurrency revolutionaries, and co-opt the new ideas to enhance their own power.

Elsewhere, Jayanth Varma argues: "In reality, it is the DAO Attack that constitutes the biggest obstacle to the theory that The DAO tokens were securities."

People are worried that people aren't worried enough.

Cliff Asness is worried that people are too worried that people aren't worried enough, or rather, he is annoyed that people keep talking about the VIX when all that it really represents is "recent realized return volatility," not any sort of complacency or long-term projection of future volatility or whatever.  

People are worried about unicorns.

Here is some worrying about age discrimination in the tech industry. The headline is "Silicon Valley ageism: ‘They were, like, wow, you use Twitter?’" As a Twitter user, this made me really sad: It has long been pretty obvious that Twitter is not exactly the hip social network for teens, but still I didn't think that being a Twitter user would mark you out as too old to work in tech. But then I read the article, and in fact Twitter use is taken as a sign of youth!

When he joined the start-up, which boasted its average age was 26, he was 52 and surprised by the “weird stereotypes” some of his younger colleagues seemed to have of older people. One called him grandpa. “I had this really big blog, I was internet famous, I had developed a TV show and worked in Hollywood, and they were like, ‘wow, you can use Twitter?’” he recalls.

I can use Twitter! I'm not out of the game yet! I still can't use Snapchat though.

People are worried about stock buybacks.

Matthew Klein at FT Alphaville isn't worried, even though "since 1960, cumulative net equity issuance" by U.S. nonfinancial public companies "has been negative $6.3 trillion." He wrote a post examining where the money comes from and goes to in the U.S. stock market, noting that "the new supply of equity has been pretty stable over the past two decades," despite "fears about the death of public markets," and that a lot of the historical de-equitization comes from mergers and acquisitions, particularly in the 1980s leveraged buyout boom. Buybacks, meanwhile, are fine:

The pace of corporate stock buybacks tends to be pretty stable relative to the level of share prices. Contrary to popular belief, there hasn’t been a systematic increase in the rate of share buybacks. There was a temporary increase during the excesses of the 2005-07 period but that’s about it.

When people worry about stock buybacks, they complain that the stock market has stopped being a place for companies to raise capital to fund innovative projects, and has become a place for companies to return capital to shareholders. And that is true! It's just that it's been true for decades. 

Things happen.

HSBC’s fresh $2bn buyback pledge affirms turnaround story. (Earnings release, interim report, presentation.) Greece’s Road to Bailout Exit: 140 Reforms Down, Many More to Go. OPEC Has a Crippling Problem: Its Members Can’t Stop Pumping. Four Activists Challenge Plans to Carve Up DowDuPont. Cartel scandal puts German business culture on the line. Pimco pulls in $50bn active cash as investors drawn to new star. If everyone is a robo-advisor then no one is a robo-advisor. "The ‘Cellino’ name is 'Better than the "Barnes"' name, he bragged, comparing the squabble to Harley Davison saying, 'No one ever calls their motorcycle a Davidson.'" "Our most-stolen authors, in order, are Baudrillard, Freud, Nietzsche, Graham Greene, Lacan, Camus, and whoever puts together the Wisden Almanack."

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