Session 2: The Objective in Corporate Finance

Summary

This script delves into the core objective of corporate finance: maximizing business value, often translated into maximizing stock prices. It critiques the utopian assumptions behind this approach and explores the potential misalignments between managerial and shareholder interests. The lecture highlights issues like greenmail, golden parachutes, poison pills, and shark repellents, which can undermine true value creation. It also emphasizes the importance of understanding power dynamics within a company, as these can significantly influence corporate decisions and governance.

Takeaways

• 🎯 The primary objective in corporate finance is to maximize the value of the business, focusing on both assets in place and growth assets.
• 📉 In practice, corporate finance often narrows its focus to maximizing stock prices, which can be a pragmatic approach due to the influence of stockholders.
• 🌐 Achieving the utopian condition where maximizing stock prices is the sole objective requires unrealistic assumptions, such as complete power of stockholders over managers, honest and timely information disclosure, and no social costs.
• 🤝 The effectiveness of the linkage between managers and stockholders is questionable, with mechanisms like annual meetings and Boards of Directors often failing to keep managers accountable.
• 💼 Managers may prioritize their interests over those of stockholders, leading to actions like greenmail, golden parachutes, and poison pills that protect their positions but not necessarily shareholder wealth.
• 🏦 The assumption that lenders will not get exploited if they lend money without protection is flawed, as seen in cases like RJR Nabisco's leveraged buyout.
• 📊 The assumption of timely and honest information disclosure by companies to financial markets is often violated, leading to market inefficiencies and misinformed trading.
• 🌐 The belief in the absence of social costs created by companies is unrealistic, as all businesses inherently create social costs that impact society.
• 🔍 Analyzing the power structure within a company is crucial for understanding where decisions are made and whose interests are being served, which can vary from managers to large shareholders or even governments.
• 🛑 The presence of activist shareholders or influential individuals, like Steve Jobs in Disney, can act as a catalyst for change and better represent the interests of smaller shareholders.

Q & A

What is the primary objective of corporate finance?

The primary objective of corporate finance is to maximize the value of the business, which includes both assets in place and growth assets.

Why does the focus on maximizing stock prices become a narrower objective in practice?

In practice, the focus narrows to maximizing stock prices because managers of publicly traded companies are often evaluated and compensated based on shareholder wealth, which is commonly measured by stock price performance.

What are the utopian conditions assumed for maximizing stock prices to be the only corporate objective?

The utopian conditions include total power of stockholders over managers, lenders not getting ripped off even without protection, companies revealing news honestly and on time, rational and cool financial markets, and no social costs created by firms.

How do the mechanisms of annual meetings and Boards of Directors affect shareholder power over managers?

Annual meetings and Boards of Directors are supposed to give shareholders power over managers, but in reality, they are often ineffective. Most shareholders don't attend annual meetings, and many proxies are not returned, leading to managers having significant control over votes. Additionally, Board members are often chosen by the CEO or are connected to management, which can lead to a lack of independent oversight.

What is the issue with the Disney Board of Directors in 1997 according to the script?

The Disney Board of Directors in 1997 was considered problematic due to its large size of 17 members, the presence of eight insiders, the chairman also being the CEO, and the majority of outside members having personal connections to the CEO, leading to a lack of independent oversight.

What are some examples of managerial interests overshadowing shareholder interests?

Examples include greenmail, golden parachutes, poison pills, shark repellents, and managerial ego driving acquisitions that don't make sense from a shareholder perspective.

How can the assumption of companies revealing information honestly and on time go wrong?

Companies may delay bad news, commit errors of omission, or even engage in outright fraud, which means information does not reach financial markets freely and on time.

What is the significance of the shift in Disney's top shareholders from 2003 to 2009?

The shift signifies a change in the power dynamics within the company. In 2009, Steve Jobs, who was known for pushing companies to change, became the largest shareholder, which could potentially lead to more proactive management and better alignment with shareholder interests.

Why is the structure of shareholding in companies like Tata Motors and Baidu significant from a corporate finance perspective?

The structure of shareholding in companies like Tata Motors and Baidu indicates that decisions may be made in the best interest of the group or controlling entities rather than individual shareholders, which can affect shareholder value and influence the company's strategic direction.

What is the implication of the discussion on corporate finance objectives and the distribution of power within a company?

The discussion implies that while the objective of corporate finance is to maximize stock prices, the distribution of power within a company can significantly influence whether this objective aligns with the interests of all shareholders, and it's crucial for investors to understand where the power lies and how it might affect their investments.

Outlines

00:00

📈 Maximizing Business Value in Corporate Finance

The session aims to explore the unique objective of corporate finance, which is to maximize the value of the business. The focus is on how this objective can also be a weakness. The speaker will discuss why corporate finance adopts this objective and how it is often narrowed down to maximizing stock prices in practice. The session will also cover the utopian conditions required for stock price maximization to be the sole corporate goal, and then examine the potential issues that can arise when these ideal conditions are not met. The concept of the financial balance sheet is reintroduced to explain how maximizing the value of assets, both existing and growth assets, is central to corporate finance.

05:03

🤔 The Pitfalls of Stock Price Maximization

This paragraph delves into the assumptions behind the utopian world where maximizing stock prices is the only corporate objective. It outlines the four linkages: managers and stockholders, firms and lenders/bondholders, firms and financial markets, and firms in society. The speaker assumes that stockholders have full control over managers, lenders are not exploited, firms are transparent with information, markets are rational, and there are no social costs. The paragraph then discusses the potential for these assumptions to be unrealistic, leading to various problems such as greenmail, golden parachutes, poison pills, shark repellents, and managerial self-interest over stockholder interests.

10:04

🏢 Power Dynamics and Corporate Governance Issues

The speaker examines the power dynamics within a company and the implications for corporate governance. They discuss the ineffectiveness of annual meetings and the Board of Directors in holding managers accountable. Examples such as Disney's Board in 1997 illustrate the issues with large boards, insider representation, and conflicts of interest. The paragraph highlights how these governance issues can lead to managers prioritizing their interests over those of the stockholders, and how the lack of stockholder power can result in decisions that do not benefit the company or its stockholders.

15:05

🔍 Analyzing Corporate Power Structures

The speaker encourages analyzing the power structure within a company to determine who has the ability to influence its direction. They discuss various scenarios where power might lie with managers, stockholders, or other entities. The speaker uses examples of companies like Disney, Valley, Tata Motors, and Baidu to illustrate different power dynamics and their impact on stockholders. They emphasize the importance of understanding where power resides and the potential influence of activist stockholders or powerful individuals in driving necessary changes within a company.

20:06

🛑 The Role of Activist Stockholders

In this paragraph, the speaker highlights the importance of activist stockholders in driving change within companies. They note that while the objective of corporate finance is to maximize stock prices, there are often multiple interests at play. The speaker uses the example of Steve Jobs becoming the largest stockholder in Disney after the acquisition of Pixar to illustrate how the presence of influential stockholders can be beneficial for driving change and challenging the status quo within a company.

Keywords

💡Corporate Finance

Corporate finance refers to the financial decisions that corporations make regarding the management of their capital and investments. It is the core of the video's theme, as it discusses the objectives and practices within this discipline. The script mentions that the endgame of corporate finance is to maximize the value of the business, highlighting the focus on financial decisions that affect the company's growth and asset management.

💡Maximizing Value

In the context of the video, maximizing value pertains to the goal of corporate finance to increase the overall worth of a company, including both its assets in place and growth assets. This concept is central to the discussion on why corporate finance is unique and how it can sometimes be reduced to the narrower objective of maximizing stock prices, which is a pragmatic approach in publicly traded companies.

💡Stockholder Wealth

Stockholder wealth is the collective value of a company's shares owned by its investors. The video emphasizes the shift in focus from maximizing the value of the business to maximizing stockholder wealth, especially in publicly traded companies. It is used to illustrate the pragmatic considerations that managers face when trying to appease shareholders, often through the objective measure of stock prices.

💡Utopian Conditions

The term 'utopian conditions' in the script refers to an idealized set of assumptions required for maximizing stock prices to be the sole objective of a company. These conditions include perfect linkages between managers and stockholders, firms and lenders, firms and financial markets, and firms in society. The video uses this term to critique the unrealistic nature of these assumptions in real-world corporate finance.

💡Managerial Interests

Managerial interests refer to the personal interests of company managers, which may sometimes conflict with those of the stockholders. The video provides examples such as greenmail, golden parachutes, poison pills, and shark repellents, which are strategies that managers might use to protect their interests at the expense of stockholder value.

💡Golden Parachutes

Golden parachutes are compensation agreements that protect managers in the event of a hostile takeover, often to the detriment of stockholder interests. The script uses this term to illustrate how managerial interests can override those of stockholders, as these agreements ensure that managers are financially secure regardless of the company's fate.

💡Poison Pills

A poison pill is a corporate defense strategy designed to deter hostile takeovers by making the acquisition unattractive to potential acquirers. The video mentions poison pills as a tool that can be used to protect managerial interests, potentially at the expense of stockholder value, by making it more difficult for stockholders to realize a premium on their shares.

💡Social Costs

Social costs are the negative externalities or impacts that a company's operations have on society, which are not directly borne by the company itself. The video critiques the utopian assumption of no social costs, pointing out that all businesses inherently create social costs that must be considered in corporate finance decisions.

💡Corporate Governance

Corporate governance involves the system of rules, practices, and processes by which a firm is directed and controlled. The script discusses the importance of understanding where power lies within a company and how corporate governance structures, such as the board of directors, can either support or fail to protect stockholder interests.

💡Activist Shareholders

Activist shareholders are investors who take an active role in influencing a company's operations, often to bring about changes they believe will increase shareholder value. The video suggests that having activist shareholders, like Steve Jobs in the case of Disney, can be beneficial as they may push for changes that entrenched management might resist.

Highlights

The endgame of corporate finance is to maximize the value of the business, focusing on both assets in place and growth assets.

The pragmatic shift in corporate finance objectives from maximizing business value to maximizing stockholder wealth due to managerial accountability to shareholders.

The reliance on stock prices as an objective measure of stockholder wealth introduces a subjective element into corporate finance.

Assumptions for a utopian corporate finance world include total power of stockholders over managers, honest financial market information, and no social costs.

The annual meeting and Board of Directors are ineffective mechanisms for stockholders to exercise power over managers.

Examples of managerial interests overriding stockholder interests include greenmail, golden parachutes, poison pills, and shark repellents.

The potential for managers to act in their self-interest rather than that of stockholders due to the lack of stockholder power.

The risk of lenders being exploited when they lend money without protecting themselves, as illustrated by the RJR Nabisco case.

The assumption of honest and timely information disclosure by firms to financial markets is often violated in reality.

Markets are not always rational or cool, with traders often making decisions based on short-term reactions and bad information.

The acknowledgment of social costs created by companies, contradicting the utopian assumption of their absence.

The process of identifying where power lies within a company and the potential for that power to be misused.

The case study of Disney's board in 1997 as an example of poor corporate governance with too many insiders and conflicts of interest.

The unique corporate structures of companies like Tata Motors and Baidu that can limit stockholder influence and control.

The importance of having activist stockholders like Steve Jobs to push for change and act as agents for stockholder interests.

The evolution of Disney's stockholder list from 2003 to 2009, reflecting changes in power dynamics and potential influence on corporate decisions.

The multifaceted interests at play in modern corporations, beyond the traditional objective of maximizing stock prices.

Transcripts

in this the second session of a

class I hope to talk about the

corporate finance every discipline needs

an endgame and in corporate finance that

endgame is what gives it focus in this

session I hope to look at what makes the

objective in corporate finance so

special and what makes it corporate

finances biggest weakness in this

session we're going to talk about the

objective in corporate finance

essentially let me show you the big

picture of corporate finance because in

a sense it will show you where we're

going with the session every discipline

needs a focus and the focus in corporate

finance comes from the fact that the

objective when you make decisions is

singular it is to maximize the value of

the business so what I'd like to do in

this session is look at why corporate

finance chooses that objective how it

gets narrowed in practice to a much

narrower objective of maximizing stock

prices lay out the utopian conditions

that you need for maximizing stock

prices to be the only objective you need

in a business then drip those utopian

conditions apart by talking about what

can go wrong and then we'll end the

session by leading into what we're going

to do next so let's get the process on

the road to understand the objective in

corporate finance it's best to go back

to the financial balance sheet that we

introduced in the very first session and

if you remember the financial balance

sheet there are two items on each side

there are assets in place and growth

assets on the asset side and debt and

equity on the other side so when you

talk about maximizing the value of the

business you're talking about maximizing

the value of the assets assets in place

and growth assets so put simply if

you're the top manager in a growth

company what I wanted to do is not just

maximize the value of the investments

you've already made but maximize the sum

of the values of the investments you've

made new growth assets you are the

steward of those growth assets so in

perfect corporate finance that's what

we'd like companies to do is to go out

and maximize the values of their

businesses but there are some pragmatic

considerations if you're the managing a

publicly traded company you're hired and

fired by stockholders you answer to them

you want to keep them happy and because

you want to keep them happy your focus

instead of maximizing the value of the

business becomes maximizing stockholder

wealth and here you face a pragmatic

issue if you accept that your job is to

maximize stockholder wealth and you want

to show your stockholders you are in

fact increasing their wealth you want an

objective measure I mean of course you

could hire a consulting firm to come in

and value your business every year but

that's a subjective judgment and people

are likely to disagree so what you'd

like is an objective third-party

estimate of stockholder wealth which

even if wrong is still objective that's

where stock prices come in if you're a

publicly traded company you could

essentially argue to your stockholders

that if your stock price went up

stockholder wealth has gone up and

implicitly you can also argue that

stockholder or stockholder wealth went

out the value of the business also went

up now that takes a whole set of

assumptions along the way but in

practice that is effectively what

happens in most companies when people

talk about maximizing something its

stock prices so let's take that and run

with it let's see what we'd need to

assume about the world for maximizing

stock prices to be the only objective

you need as a company I'm going to call

this a utopian word from its corporate

finance is born and the very fact that I

call it utopian should tell you

something about the assumptions that are

coming

utopia never existed and these

assumptions are blatantly unrealistic

but I'm going to state them anyway so

here are the assumptions you need for

maximizing stock prices to be the only

objective you need as a company I'm

going to state these assumptions in

terms of for linkages the first is the

linkage between managers and

stockholders the second is the linkage

between the firm and lenders /

bondholders the third is the linkage

between firms and financial markets and

the fourth is the linkage between firms

in society

here's what I'm going to assume about

each one I'm going to assume that

stockholders have total power over

managers they can hire them they can

fire them and because they have total

power I'm going to assume that managers

will go out and do stockholders bidding

in other words they will want to keep

stockholders happy at any cost I'm going

to assume that lenders if they lend

money to a company even if they don't

protect themselves will not get ripped

off so what I'm effectively assuming is

even if there are loopholes the size of

a Mack truck borrowers will not take

advantage of lenders why you could tell

it

a story that because if to go back to

those lenders you're not going to rip

them off but it is an assumption the

third linkage firms and financial

markets here's what I'm going to assume

I'm going to assume that companies

reveal news about themselves good and

bad or in a timely way and honestly I

told you that these were utopian

assumptions and I'm also going to assume

that markets are rational and cool the

trading room in this particular utopian

world would be filled with intellectual

people are involved in long discussions

about value nothing like a typical

trading room but in the utopian world

that's what I'm going to assume and

finally I'm going to assume there are no

social costs what a social cost these

are costs that companies create for

society that cannot be traced back and

charged to the company now why am I

making these assumptions I want to make

the world safe for maximizing stock

prices in other words I'm going to take

away all the bad ways in which you can

increase your stock price let's face it

you could increase the stock prices of

your stockholders

by going on going out and ripping off

your bondholders you can increase your

stock price by lying to financial

markets you can increase stock prices by

creating huge social costs you can't do

any of those things in the utopian world

that I've just described so that's the

world from which traditional corporate

finance is born now let's think about

what can go wrong in fact the title for

the slide should really be what cannot

go wrong because in a sense everything

that can go wrong will go wrong let's

take each of the linkages first remember

what I assumed about stockholders and

managers I assume that stockholders have

complete power over managers the two

mechanisms that stockholders have to

exercise power are the annual meeting

and the Board of Directors and neither

unfortunately is very effective at

keeping managers in line first let's

take the annual meeting most

stockholders don't show up at annual

meetings and it's not in their economic

best interest to do so because if you

own a thousand shares showing up an

annual meeting will wipe out a big chunk

of your profits so most of us get

proxies which we can vote even though

we're not at the meeting it allows us to

vote in absentia unfortunately though

most stockholders don't return their

proxies and here's what happens in

companies where proxies don't get

returned in most companies man

just get to vote those proxies

effectively that means at an annual

meeting if you're the if you're the

incumbent manager you might start off

with 45 50 or 55 percent of votes

already in your favor it is very

difficult to get a vote against

incumbent managers at an annual meeting

you think what about the board of

directors well think about it who comes

up with the name so the people who

served in the Board of Directors of a

publicly traded company it's not some

independent group of people who really

don't care about what the top management

thing in most cases either CEO or a

committee that thinks about what the CEO

would like to see there in most

companies the people who serve in the

board of directors are people that the

CEO once in the board fact let me show

you an example of a really bad board

here in my view is one of the worst

corporate boards created and it's

Disney's Board in 1997 they explain why

I think this is such a bad board first

there are 17 members in the board that's

way too many for a board in fact studies

show that once you get past about 9 or

10 members it becomes counterproductive

that's just too many people to make a

decision second eight of the 17 members

in this board are inside us they either

work for Disney or used to work for

Disney in other words they work for the

company that they oversee this is the

board after all that is supposed to keep

an eye on top management the third issue

with the board is the chairman of the

board Michael Eisner happens to be the

CEO of Disney now remember what this

board is supposed to do it's supposed to

keep an eye on the top management and

the person heading the board is the top

manager himself well good luck with that

the fourth and final factor is even if

you look at the nine outside of the

board they're really not outside us they

all have connections to Michael Eisner

in one way or the other in fact as you

go down the list you will see Michael

Eisner zs-- personal attorney on the

board you'd see the head mayor

headmistress of the prayer of the

elementary school that his kids went to

you'd see somebody from Georgetown

University that his son attended in

other words that the tangle of conflicts

of interests here is pretty deep and

this is the board that's supposed to

keep an eye on Michael Eisner

during the 1990s Disney did some very

strange things from a stockholder

perspective and often you'd see people

asking why

the board let michael eisner do that the

answer lies in this particular board

this is the board that is supposed to

keep an eye on Michael Eisner there is

little chance that it will accomplish

that objective

this is a rubber-stamp board and

unfortunately in most companies the

Board of Directors acts as a rubber

stamp for top management so let me go

back to the previous page and and return

to my story stockholders have little

power now over managers because the

annual meeting is not very effective and

the Board of Directors works more for

the managers than it does for the

stockholders so you think so what well

managers given a choice will then put

their interests of a stockholder

interests again I'm going to move

forward a couple of slides to illustrate

some examples of managerial interests

overwhelming stockholder interests here

are five examples of managers putting

their interests of a stockholder

interests the first is what's called

green male what's green male it's just

like black male but it's a lot more

money and it's legal it's often in

response to a hostile acquisition where

the managers do not want the company to

be acquired here's what they do they go

to the acquirer and offer him 50 hundred

150 million dollars more - just go away

often they you stockholder wealth to

fight off the hostile acquisition the

only interest being served in green mail

are the interests of the managers not

the stockholders second is golden

parachutes golden parachutes are special

deals put into compensation contracts by

managers after they've been targeted in

a hostile acquisition the only purpose

again of golden parachutes is to protect

the managers in case the company gets

taken over again stockholder interests

are way down the line the third example

is poison pills a poison pill is

something you introduced into your

company to make it unpalatable to

acquirers basically it makes hostile

acquisitions much more difficult and in

the process makes it less likely that

your stockholders will get a premium on

their stock price the fourth are shark

repellents these are special anti

takeover amendments put into a company

at least on these the stock holders get

to vote but as we said earlier because

most stock holders do not

show up at annual meetings many of these

antitakeover amendments find their way

into the corporate charter here's a

simple one instead of having to acquire

51% to buy a company there are some

companies where that threshold can be

raised to 60 70 or even 80 percent and

finally and here's where you see in

commits managers and stockholder

interests really clash if you're the

acquiring company in an acquisition and

you're using stockholder money to do the

acquisitions the case of many CEOs their

ego and self-interest will drive them to

do acquisitions which really make no

sense from a stockholder perspective but

all of this again relates back to a

fundamental problem which is that

stockholders of little power over

managers so again going back to pages

what can go wrong if stockholders have

little power over managers managers are

going to do things that are not in

stockholders interests and you can't

blame them

self-interest is the dominant paradigm

when it comes to human behavior take the

second linkage I assume that lenders

lend money to a company and they don't

protect themselves what can go wrong

lots as we see in stories that happen

all around us when banks and bondholders

lend money to firms and they don't

protect themselves they are often

exploitive me give you an example RJR

nabisco company they've been around a

long time in the early 1980s a lot of

people who bought our journal Bisco bond

saying hey it's a well-established

company it's got a great reputation what

can go wrong

four years later our Gen abisco is

targeted in a leveraged buyout you think

what's that well KKR a private equity

firm in New York targeted RJR nabisco

and they quadrupled Nabisco's debt in

the process they impoverished existing

bondholders and lenders in fact on the

day of the LBL Nabisco bond prices

dropped by 20% in fact I've introduced a

word into the finance lexicon that I

called Nabisco if you bought if you lend

money to a company and you don't protect

yourself you are begging to be in abbis

code let's take the linkage within firms

in financial markets I assume that firms

reveal information to financial markets

honestly and on time in what universe

the universe that I live in company

constantly delay bad news they might not

lie but there are errors of omission

rather than errors of commission once in

a while you do get companies that cross

the line and commit outright fraud in

other words information does not get to

financial markets

freely and on time and in response

markets are not angelic either the

trading room that I described full of

polite intellectuals well that's not

exactly the trading room you see in the

real world traders tend to be short-term

they tend to be reactive and often they

make decisions on bad information so

markets are not that cool and not that

rational and finally we know that

companies create social costs not just

bad companies but all businesses create

social costs it's unavoidable so the

assumption that there are no social

costs is laughable this is the word we

live in if you go out and our CEOs to

maximize stock prices in this particular

world you can see that terrible things

can happen to companies and terrible

things can happen to people around

companies you can maximize stock prices

by doing all the wrong things that is of

course a problem because traditional

corporate finance put so much weight on

market prices so here's what I'd like to

do I'd like to at least set the process

going by thinking about any company and

I'm going to take my companies through

this process and I'd encourage you to

pick a company in your own and take it

through this process what I'm going to

try to do is look at where the power in

my company lies or put differently if I

as a stockholder in this company

whatever that company might be we'll

have any say in how the company's run

power or Bors a vacuum and in any

publicly traded company it's going to go

somewhere and hear your choices it can

dress with the managers it can dress

with stockholders but it might dress

with inside stockholders we're inside

stockholders well in many big companies

these might be the people own large

stakes of stock and a have a say in the

management of the company it might

sometimes be with outside stockholders

you know in some odd cases it might

dress for the government it might lie

with lenders and even employees might

ever say in how a company is right one

of the first things you do before you

look at the numbers and the companies

look to see

where the power in a company lies so

with my companies let me try here's what

I'm going to do I'm going to take each

of my companies and look at who own

shares in the companies and then ask a

question as a stockholder in that

company can I look at this list and

expect any of the people on this list to

watch out for my interests so let me

start with this me in 2003 I was a

stockholder in 2003 and as I looked at

this list that year my stomach dropped

because out of this out of the 17 top

stockholders in Disney and these were

the 17 top stockholders in Disney 2003

16 were institutional investors mutual

funds and pension funds you're saying so

what well we know how institutional

investors react to disappointment if

they don't like the way a company's run

rather than stand and fight or get the

company to change the way it's run they

walk away this sell and move on so

that's what I'd expect these 16

institutional investors to do they're

not going to be looking out for my

interests the only individual on that

list is Roy Disney and at least in 2003

he was still part of Disney's top

management so I don't have much hope

resting on him either the case of Disney

I'm afraid as an individual stockholder

I don't see much hope in 2003 the second

company I'm going to look at is Valley

valleys two classes of shares and that

already makes me a little unhappy as a

stockholder in Valley

I own the shares with the fuel voting

rights their higher voting ride shares

are basically held by seven entities

which control Valley one of them is an

entity called Valley spar which appoints

most of the directors for Valley they

effectively run the company so as a

stockholder in Valley what do I expect

to do not much I very little power in

the company because those seven big

investors inva in the in the voting

shares will run the company one added

can added feature in valley that might

make it an issue in corporate governance

they have a golden share what's a golden

share a golden shares a share with veto

power and the Brazilian government owns

it what it effectively gives the

Brazilian government the power to do is

make a judgment on big decisions and say

no

again as a stockholder in volley I have

to I've to walking with open eyes and

recognize that sometimes there will be

things that I want violate to do that

they will not be able to do because of

that golden share third case I looked at

Toyota Motors and I looked at the top

stockholders and I noticed quite a few

Tata companies on that list

remember I said Tata Motors was part of

a family group called the Tata Group the

way these companies preserve control for

the families by holding shares in each

other it becomes almost impossible for

outsiders to change the way these

companies are run so the case of Tata

Motors here's what I expect to see as we

go through this process I expect to see

a lot of decisions made by the company

that are in the best interest of the

group but may not be in my best interest

as a Tata Motors stockholder the fourth

company that I looked at was Baidu and

Baidu is a very unique holding structure

when you buy shares and Baidu you're not

buying shares and Baidu the chinese

search engine you're buying shares in

Baidu the Cayman Islands shell company

that company has a legal arrangement

with the operating company in China

allowing it to run the company and

collect the profits but that legal

arrangement might be subject to

oversight by the Chinese government the

Chinese government might decide tomorrow

the day after that that legal

arrangement does not hold up I'm in a

very weak position when it comes to

Baidu because I don't control the real

company and I definitely don't control

the management of the company but that

again is something you have to factor

and when you look at corporate finance

decisions and here's the final slide I

want to show you I showed you what

Disney look like in 2003 fast-forward

six years here's what Disney stopped

seventeen stockholders look like in 2009

notice a very big difference who's on

top of the list Steve Jobs right how did

Steve Jobs become the largest

stockholder in Disney well he owned 60%

of Pixar and when Disney bought Pixar he

became the largest stockholder in Disney

as a stockholder in Disney doesn't

matter to me

I think so I feel a little more

comfortable with these stockholders in

2009 than I did in 2003 not because

Steve Jobs is watching art for me

but because I have a feeling that he

will push the company to change if it

needs change in other words we want

somebody rocking the boat as

stockholders because existing management

is stuck with inertia and as far as I'm

concerned Steve Jobs is going to be my

agent for change in 2009 so what you're

looking at in a company is basically

things that might change the way the

company is run and whether any of the

managers in this company can be forced

to do things differently not because you

own a thousand shares but because

there's somebody on this list who's

activists and enough powerful enough to

make changes so it might be a call I can

it might be a Bill Ackman it might be a

book sure Hathaway but you want somebody

pushing for your interest because you

really don't have the power to make the

change yourself so as we go through this

process remember the objective and

corporate finance might be maximizing

stock prices but there are multiple

interests at play in a modern

corporation thank you

you