case 3: cross and pyramid holdings tata motor s …adamodar/podcasts/cfugspr16/...case 3: cross and...
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Case3:CrossandPyramidHoldingsTataMotor’stopstockholdersin2013
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Case4:LegalrightsandCorporateStructures:Baidu¨ TheBoard:Thecompanyhassixdirectors,oneofwhomisRobinLi,
whoisthefounder/CEOofBaidu.Mr.LialsoownsamajoritystakeofClassBshares,whichhavetenNmesthevoNngrightsofClassAshares,granNnghimeffecNvecontrolofthecompany.
¨ Thestructure:BaiduisaChinesecompany,butitisincorporatedintheCaymanIslands,itsprimarystocklisNngisontheNASDAQandthelistedcompanyisstructuredasashellcompany,togetaroundChinesegovernmentrestricNonsofforeigninvestorsholdingsharesinChinesecorporaNons.
¨ Thelegalsystem:Baidu’soperaNngcounterpartinChinaisstructuredasaVariableInterestEnNty(VIE),anditisunclearhowmuchlegalpowertheshareholdersintheshellcompanyhavetoenforcechangesattheVIE.
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Thingschange..Disney’stopstockholdersin2009
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II.Stockholders'objecNvesvs.Bondholders'objecNves
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¨ Intheory:thereisnoconflictofinterestsbetweenstockholdersandbondholders.
¨ Inprac3ce:StockholderandbondholdershavedifferentobjecNves.Bondholdersareconcernedmostaboutsafetyandensuringthattheygetpaidtheirclaims.StockholdersaremorelikelytothinkaboutupsidepotenNal
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Examplesoftheconflict..
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¨ Adividend/buybacksurge:Whenfirmspaycashoutasdividends,lenderstothefirmarehurtandstockholdersmaybehelped.Thisisbecausethefirmbecomesriskierwithoutthecash.
¨ Riskshi^ing:Whenafirmtakesriskierprojectsthanthoseagreedtoattheoutset,lendersarehurt.LendersbaseinterestratesontheirpercepNonsofhowriskyafirm’sinvestmentsare.Ifstockholdersthentakeonriskierinvestments,lenderswillbehurt.
¨ Borrowingmoreonthesameassets:Iflendersdonotprotectthemselves,afirmcanborrowmoremoneyandmakeallexisNnglendersworseoff.
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AnExtremeExample:UnprotectedLenders?
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III.FirmsandFinancialMarkets
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¨ Intheory:Financialmarketsareefficient.ManagersconveyinformaNonhonestlyandandinaNmelymannertofinancialmarkets,andfinancialmarketsmakereasonedjudgmentsoftheeffectsofthisinformaNonon'truevalue'.Asaconsequence-¤ Acompanythatinvestsingoodlongtermprojectswillberewarded.
¤ ShorttermaccounNnggimmickswillnotleadtoincreasesinmarketvalue.
¤ Stockpriceperformanceisagoodmeasureofcompanyperformance.
¨ InpracNce:Therearesomeholesinthe'EfficientMarkets'assumpNon.
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ManagerscontrolthereleaseofinformaNontothegeneralpublic
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¨ InformaNonmanagement(Nmingandspin):InformaNon(especiallynegaNve)issomeNmessuppressedordelayedbymanagersseekingabeeerNmetoreleaseit.WhentheinformaNonisreleased,firmsfindwaysto“spin”or“frame”ittoputthemselvesinthebestpossiblelight.
¨ Outrightfraud:Insomecases,firmsreleaseintenNonallymisleadinginformaNonabouttheircurrentcondiNonsandfutureprospectstofinancialmarkets.
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Evidencethatmanagersdelaybadnews?
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DO MANAGERS DELAY BAD NEWS?: EPS and DPS Changes- byWeekday
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Monday Tuesday Wednesday Thursday F r i d a y
% Chg(EPS) % Chg(DPS)
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SomecriNquesofmarketefficiency..
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¨ InvestorirraNonality:ThebaseargumentisthatinvestorsareirraNonalandpriceso^enmovefornotreasonatall.Asaconsequence,pricesaremuchmorevolaNlethanjusNfiedbytheunderlyingfundamentals.EarningsanddividendsaremuchlessvolaNlethanstockprices.
¨ ManifestaNonsofirraNonality¨ ReacNontonews:Somebelievethatinvestorsoverreactto
news,bothgoodandbad.OthersbelievethatinvestorssomeNmesunderreacttobignewsstories.
¨ Aninsiderconspiracy:Financialmarketsaremanipulatedbyinsiders;PricesdonothaveanyrelaNonshiptovalue.
¨ Shorttermism:Investorsareshort-sighted,anddonotconsiderthelong-termimplicaNonsofacNonstakenbythefirm
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Aremarketsshortsightedandtoofocusedonthenearterm?Whatdoyouthink?
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¨ Focusingonmarketpriceswillleadcompaniestowardsshorttermdecisionsattheexpenseoflongtermvalue.a. Iagreewiththestatementb. Idonotagreewiththisstatement
¨ Allowingmanagerstomakedecisionswithouthavingtoworryabouttheeffectonmarketpriceswillleadtobeeerlongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
¨ Neithermanagersnormarketsaretrustworthy.RegulaNons/lawsshouldbewrieenthatforcefirmstomakelongtermdecisions.a. Iagreewiththisstatementb. Idonotagreewiththisstatement
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Aremarketsshortterm?Someevidencethattheyarenot..
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¨ Valueofyoungfirms:Therearehundredsofstart-upandsmallfirms,withnoearningsexpectedinthenearfuture,thatraisemoneyonfinancialmarkets.Whywouldamyopicmarketthatcaresonlyaboutshorttermearningsaeachhighpricestothesefirms?
¨ CurrentearningsvsFuturegrowth:Iftheevidencesuggestsanything,itisthatmarketsdonotvaluecurrentearningsandcashflowsenoughandvaluefutureearningsandcashflowstoomuch.A^erall,studiessuggestthatlowPEstocksareunderpricedrelaNvetohighPEstocks
¨ MarketreacNontoinvestments:ThemarketresponsetoresearchanddevelopmentandinvestmentexpendituresisgenerallyposiNve.
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Ifmarketsaresoshortterm,whydotheyreacttobiginvestments(thatpotenNallylowershorttermearnings)soposiNvely?
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Butwhataboutmarketcrises?
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¨ Marketsaretheproblem:ManycriNcsofmarketspointtomarketbubblesandcrisesasevidencethatmarketsdonotwork.Forinstance,themarketturmoilbetweenSeptemberandDecember2008ispointedtoasbackingforthestatementthatfreemarketsarethesourceoftheproblemandnotthesoluNon.
¨ Thecounter:Therearetwocounterargumentsthatcanbeoffered:¤ Theeventsofthelastquarterof2008illustratethatwearemore
dependentonfuncNoning,liquidmarkets,withrisktakinginvestors,thaneverbeforeinhistory.Aswesaw,nogovernmentorotherenNty(bank,Buffee)isbigenoughtostepinandsavetheday.
¤ Thefirmsthatcausedthemarketcollapse(banks,investmentbanks)wereamongthemostregulatedbusinessesinthemarketplace.Ifanything,theirfailurescanbetracedtotheiraeemptstotakeadvantageofregulatoryloopholes(badlydesignedinsuranceprograms…capitalmeasurementsthatmissriskyassets,especiallyderivaNves)
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IV.FirmsandSociety
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¨ Intheory:Allcostsandbenefitsassociatedwithafirm’sdecisionscanbetracedbacktothefirm.
¨ InpracNce:Financialdecisionscancreatesocialcostsandbenefits.¤ Asocialcostorbenefitisacostorbenefitthataccruestosocietyasawholeandnottothefirmmakingthedecision.n Environmentalcosts(polluNon,healthcosts,etc..)n QualityofLife'costs(traffic,housing,safety,etc.)
¤ Examplesofsocialbenefitsinclude:n creaNngemploymentinareaswithhighunemploymentn supporNngdevelopmentininnerciNesn creaNngaccesstogoodsinareaswheresuchaccessdoesnotexist
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SocialCostsandBenefitsaredifficulttoquanNfybecause..
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¨ Cannotknowtheunknown:TheymightnotbeknownattheNmeofthedecision.Inotherwords,afirmmaythinkthatitisdeliveringaproductthatenhancessociety,attheNmeitdeliverstheproductbutdiscovera^erwardsthatthereareverylargecosts.(Asbestoswasawonderfulproduct,whenitwasdevised,lightandeasytoworkwith…Itisonlya^erdecadesthatthehealthconsequencescametolight)
¨ Eyesofthebeholder:Theyare‘person-specific’,sincedifferentdecisionmakerscanlookatthesamesocialcostandweightthemverydifferently.
¨ Decisionparalysis:Theycanbeparalyzingifcarriedtoextremes.
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Atestofyoursocialconsciousness:Putyourmoneywhereyoumouthis…
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¨ AssumethatyouworkforDisneyandthatyouhaveanopportunitytoopenastoreinaninner-cityneighborhood.Thestoreisexpectedtoloseaboutamilliondollarsayear,butitwillcreatemuch-neededemploymentinthearea,andmayhelprevitalizeit.
¨ Wouldyouopenthestore?¤ Yes¤ No
¨ Ifyes,wouldyoutellyourstockholdersandletthemvoteontheissue?¤ Yes¤ No
¨ Ifno,howwouldyourespondtoastockholderqueryonwhyyouwerenotlivinguptoyoursocialresponsibiliNes?
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Sothisiswhatcangowrong...
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STOCKHOLDERS
Managers puttheir interestsabove stockholders
Have little controlover managers
BONDHOLDERSLend Money
Bondholders canget ripped off
FINANCIAL MARKETS
SOCIETYManagers
Delay badnews or provide misleadinginformation
Markets makemistakes andcan over react
Significant Social Costs
Some costs cannot betraced to firm
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TradiNonalcorporatefinancialtheorybreaksdownwhen...
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¨ Managerialself-interest:Theinterests/objecNvesofthedecisionmakersinthefirmconflictwiththeinterestsofstockholders.
¨ Unprotecteddebtholders:Bondholders(Lenders)arenotprotectedagainstexpropriaNonbystockholders.
¨ Inefficientmarkets:Financialmarketsdonotoperateefficiently,andstockpricesdonotreflecttheunderlyingvalueofthefirm.
¨ Largesocialsidecosts:Significantsocialcostscanbecreatedasaby-productofstockpricemaximizaNon.
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WhentradiNonalcorporatefinancialtheorybreaksdown,thesoluNonis:
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¨ Anon-stockholderbasedgovernancesystem:Tochooseadifferentmechanismforcorporategovernance,i.e,assigntheresponsibilityformonitoringmanagerstosomeoneotherthanstockholders.
¨ AbeeerobjecNvethanmaximizingstockprices?TochooseadifferentobjecNveforthefirm.
¨ Maximizestockpricesbutminimizesidecosts:Tomaximizestockprice,butreducethepotenNalforconflictandbreakdown:¤ Makingmanagers(decisionmakers)andemployeesintostockholders¤ ProtectlendersfromexpropriaNon¤ ByprovidinginformaNonhonestlyandpromptlytofinancialmarkets¤ Minimizesocialcosts
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I.AnAlternaNveCorporateGovernanceSystem
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¨ GermanyandJapandevelopedadifferentmechanismforcorporategovernance,baseduponcorporatecrossholdings.¤ InGermany,thebanksformthecoreofthissystem.¤ InJapan,itisthekeiretsus¤ OtherAsiancountrieshavemodeledtheirsystema^erJapan,withfamily
companiesformingthecoreofthenewcorporatefamilies¨ Attheirbest,themostefficientfirmsinthegroupworkatbringing
thelessefficientfirmsuptopar.Theyprovideacorporatewelfaresystemthatmakesforamorestablecorporatestructure
¨ Attheirworst,theleastefficientandpoorlyrunfirmsinthegrouppulldownthemostefficientandbestrunfirmsdown.Thenatureofthecrossholdingsmakesitsverydifficultforoutsiders(includinginvestorsinthesefirms)tofigureouthowwellorbadlythegroupisdoing.
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II.ChooseaDifferentObjecNveFuncNon
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¨ FirmscanalwaysfocusonadifferentobjecNvefuncNon.Exampleswouldinclude¤ maximizingearnings¤ maximizingrevenues¤ maximizingfirmsize¤ maximizingmarketshare¤ maximizingEVA
¨ ThekeythingtorememberisthattheseareintermediateobjecNvefuncNons.¤ Tothedegreethattheyarecorrelatedwiththelongtermhealthandvalueofthecompany,theyworkwell.
¤ Tothedegreethattheydonot,thefirmcanendupwithadisaster
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III.MaximizeStockPrice,subjectto..
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¨ ThestrengthofthestockpricemaximizaNonobjecNvefuncNonisitsinternalselfcorrecNonmechanism.Excessesonanyofthelinkageslead,ifunregulated,tocounteracNonswhichreduceoreliminatetheseexcesses
¨ Inthecontextofourdiscussion,¤ managerstakingadvantageofstockholdershasledtoamuchmore
acNvemarketforcorporatecontrol.¤ stockholderstakingadvantageofbondholdershasledtobondholders
protecNngthemselvesattheNmeoftheissue.¤ firmsrevealingincorrectordelayedinformaNontomarketshasledto
marketsbecomingmore“skepNcal”and“puniNve”¤ firmscreaNngsocialcostshasledtomoreregulaNons,aswellas
investorandcustomerbacklashes.
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TheStockholderBacklash
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¨ AcNvistInsNtuNonalinvestorshavebecomemuchmoreacNveinmonitoringcompaniesthattheyinvestinanddemandingchangesinthewayinwhichbusinessisdone.TheyhavebeenjoinedbyprivateequityfundslikeKKRandBlackstone.
¨ AcNvistindividualslikeCarlIcahnspecializeintakinglargeposiNonsincompanieswhichtheyfeelneedtochangetheirways(Blockbuster,TimeWarner,Motorola&Apple)andpushforchange.
¨ Vocalstockholders,armedwithmoreinformaNonandnewpowers:AtannualmeeNngs,stockholdershavetakentoexpressingtheirdispleasurewithincumbentmanagementbyvoNngagainsttheircompensaNoncontractsortheirboardofdirectors
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TheHosNleAcquisiNonThreat
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¨ ThetypicaltargetfirminahosNletakeoverhas¤ areturnonequityalmost5%lowerthanitspeergroup¤ hadastockthathassignificantlyunderperformedthepeergroupovertheprevious2years
¤ hasmanagerswhoholdlieleornostockinthefirm¨ Inotherwords,thebestdefenseagainstahosNletakeoveristorunyourfirmwellandearngoodreturnsforyourstockholders
¨ Conversely,whenyoudonotallowhosNletakeovers,thisisthefirmthatyouaremostlikelyprotecNng(andnotawellrunorwellmanagedfirm)
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Inresponse,boardsarebecomingmoreindependent…
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¨ BoardshavebecomesmalleroverNme.Themediansizeofaboardofdirectorshasdecreasedfrom16to20inthe1970stobetween9and11in1998.ThesmallerboardsarelessunwieldyandmoreeffecNvethanthelargerboards.
¨ Therearefewerinsidersontheboard.Incontrasttothe6ormoreinsidersthatmanyboardshadinthe1970s,onlytwodirectorsinmostboardsin1998wereinsiders.
¨ DirectorsareincreasinglycompensatedwithstockandopNonsinthecompany,insteadofcash.In1973,only4%ofdirectorsreceivedcompensaNonintheformofstockoropNons,whereas78%didsoin1998.
¨ MoredirectorsareidenNfiedandselectedbyanominaNngcommieeeratherthanbeingchosenbytheCEOofthefirm.In1998,75%ofboardshadnominaNngcommieees;thecomparablestaNsNcin1973was2%.
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Disney:Eisner’srise&fallfromgrace
¨ InhisearlyyearsatDisney,MichaelEisnerbroughtaboutlong-delayedchangesinthecompanyandputitonthepathtobeinganentertainmentgiantthatitistoday.HissuccessallowedhimtoconsolidatepowerandtheboardsthathecreatedwereincreasinglycapNveones(seethe1997board).
¨ In1996,EisnerspearheadedthepushtobuyABCandtheboardrubberstampedhisdecision,astheyhadwithothermajordecisions.Intheyearsfollowing,thecompanyranintoproblemsbothonitsABCacquisiNonandonitsotheroperaNonsandstockholdersstartedtogetresNve,especiallyasthestockpricehalvedbetween1998and2002.
¨ In2003,RoyDisneyandStanleyGoldresignedfromtheDisneyboard,arguingagainstEisner’sautocraNcstyle.
¨ Inearly2004,ComcastmadeahosNlebidforDisneyandlaterintheyear,43%ofDisneyshareholderswithheldtheirvotesforEisner’sreelecNontotheboardofdirectors.Followingthatvote,theboardofdirectorsatDisneyvotedunanimouslytoelectGeorgeMitchellastheChairoftheboard,replacingEisner,whovowedtostayonasCEO.
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Eisner’sconcession:Disney’sBoardin2003
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Board Members OccupationReveta Bowers Head of school for the Center for Early Education,John Bryson CEO and Chairman of Con EdisonRoy Disney Head of Disney AnimationMichael Eisner CEO of DisneyJudith Estrin CEO of Packet Design (an internet company)Stanley Gold CEO of Shamrock HoldingsRobert Iger Chief Operating Officer, DisneyMonica Lozano Chief Operation Officer, La Opinion (Spanish newspaper)George Mitchell Chairman of law firm (Verner, Liipfert, et al.)Thomas S. Murphy Ex-CEO, Capital Cities ABCLeo O’Donovan Professor of Theology, Georgetown UniversitySidney Poitier Actor, Writer and DirectorRobert A.M. Stern Senior Partner of Robert A.M. Stern Architects of New YorkAndrea L. Van de Kamp Chairman of Sotheby's West CoastRaymond L. Watson Chairman of Irvine Company (a real estate corporation)Gary L. Wilson Chairman of the board, Northwest Airlines.
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ChangesincorporategovernanceatDisney
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1. RequiredatleasttwoexecuNvesessionsoftheboard,withouttheCEOorothermembersofmanagementpresent,eachyear.
2. CreatedtheposiNonofnon-managementpresidingdirector,andappointedSenatorGeorgeMitchelltoleadthoseexecuNvesessionsandassistinsevngtheworkagendaoftheboard.
3. AdoptedanewandmorerigorousdefiniNonofdirectorindependence.4. RequiredthatasubstanNalmajorityoftheboardbecomprisedof
directorsmeeNngthenewindependencestandards.5. ProvidedforareducNonincommieeesizeandtherotaNonof
commieeeandchairmanshipassignmentsamongindependentdirectors.
6. AddednewprovisionsformanagementsuccessionplanningandevaluaNonsofbothmanagementandboardperformance
7. ProvidedforenhancedconNnuingeducaNonandtrainingforboardmembers.
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Eisner’sexit…andanewagedawns?Disney’sboardin2008
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ButasaCEO’stenurelengthens,doescorporategovernancesuffer?1. Whiletheboardsizehasstayedcompact(attwelvemembers),
therehasbeenonlyonechangesince2008,withSherylSandberg,COOofFacebook,replacingthedeceasedSteveJobs.
2. TheboardvotedreinstateIgeraschairoftheboardin2011,reversingadecisionmadetoseparatetheCEOandChairposiNonsa^ertheEisneryears.
3. In2011,IgerannouncedhisintenttostepdownasCEOin2015butDisney’sboardconvincedIgertostayonasCEOforanextrayear,forthe“thegoodofthecompany”.
4. ThereweresignsofresNvenessamongDisney’sstockholders,especiallythoseinterestedincorporategovernance.AcNvistinvestors(CalSTRS)starNngmakingnoiseandInsNtuNonalShareholderServices(ISS),whichgaugescorporategovernanceatcompanies,raisedredflagsaboutcompensaNonandboardmonitoringatDisney.
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WhataboutlegislaNon?
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¨ EverycorporatescandalcreatesimpetusforalegislaNveresponse.ThescandalsatEnronandWorldComlaidthegroundworkforSarbanes-Oxley.
¨ Youcannotlegislategoodcorporategovernance.¤ ThecostsofmeeNnglegalrequirementso^enexceedthebenefits
¤ Lawsalwayshaveunintendedconsequences¤ Ingeneral,lawstendtobeblunderbussesthatpenalizegoodcompaniesmorethantheypunishthebadcompanies.
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Isthereapayofftobeeercorporategovernance?
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¨ Inthemostcomprehensivestudyoftheeffectofcorporategovernanceonvalue,agovernanceindexwascreatedforeachof1500firmsbasedupon24disNnctcorporategovernanceprovisions.¤ BuyingstocksthathadthestrongestinvestorprotecNonswhilesimultaneously
sellingshareswiththeweakestprotecNonsgeneratedanannualexcessreturnof8.5%.
¤ EveryonepointincreaseintheindextowardsfewerinvestorprotecNonsdecreasedmarketvalueby8.9%in1999
¤ FirmsthatscoredhighininvestorprotecNonsalsohadhigherprofits,highersalesgrowthandmadefeweracquisiNons.
¨ ThelinkbetweenthecomposiNonoftheboardofdirectorsandfirmvalueisweak.SmallerboardsdotendtobemoreeffecNve.
¨ Onapurelyanecdotalbasis,acommonthemeatproblemcompaniesandisanineffecNveboardthatfailstoasktoughquesNonsofanimperialCEO.