5 Ways Corporate Governance Affects Investors and Stock Valuations

Published on Apr 14, 2016

Get to the source of shenanigans at companies. Knowing the drivers of good and bad executive behavior makes you a better investor.

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0:00make sure enjoy our webinar today five ways corporate governance facts
0:06investors in stock valuations i'm david dreier the CEO constructs and I'm gonna
0:13get right to the point
0:15governments really comes down to five really important that I called the 5 C's
0:21CEO leadership capital budgeting compensation communication competition
0:28at the CEOs and leave in caring about creating shareholder value and no one's
0:36gonna believe it you don't have top down into its to focus on doing what's right
0:42for investors you're probably not gonna really be that look no farther than
0:49valiant for example of bad leadership capital budgeting if you're not making
0:56decisions about how you allocate capital based on returns on invested capital
1:02based on casual cash return and BB you're not thinking like that then
1:11you're back and investors want to avoid that great example if you are looking at
1:20acquisitions or investments solely based on what kind of revenue that's not good
1:27capital budgeting capital budget not even taking into account the cost that's
1:35a bad thing and really the only way you know someone's joint capital budgeting
1:40right ways they're talking about cash or cashiers it doesn't have to be called
1:44return on invested capital which had to be called something that's true to the
1:49meaning of understanding how much cash for your getting relative atomic capital
1:54you compensation let's face it
1:58executives and leaders will do the most money college human nature is called
2:05self interest if you're paying people
2:10is not linked to creating shareholder value but late to whatever is linked to
2:18is what they're into
2:20not gonna get what you need your executives to be doing if you don't pay
2:25them based on those metrics communication gotta talk about it you
2:34can't articulate the message if you can convince me that you understand return
2:37on capital and that you're you're pushing it through the Organization ICAO
2:44terms of leadership re capital budgeting compensation of the company believes
2:51it's not that hard to articulate will do it for you watch the webinar we're
2:57trying our best to capo see the white paper on return on invested capital and
3:03you'll understand it's not that hard to communicate lastly competition to beat
3:11the competition and focus on return on invested capital that's what drives
3:16valuation
3:19convinced the market that you can out-compete yours yours though some
3:24returned to Mexico so really the purpose of this webinar is in linking all the
3:30webinars we've done together in the kind of the big picture message and you can
3:37see all of our webinars in the Education section of our website
3:46the big kind of clear message here for full circle is governance corporate
3:54governance the end of the day these are the people that said the business up to
3:59succeed or not we talk about american express what we talk about when we talk
4:06about G all always comes to be done case studies and all comes back to return on
4:11invested capital that's what drives valuation and that's what executive
4:17August are so focused on companies with good leadership how to define good
4:27leadership leadership means good corporate governance which means
4:30focusing on return on invested capital was the basis of argument particularly
4:35ideas that 300 cash flows matter and superior profitability is ultimately
4:41rewarded by the market financings into it
4:45been in the business for over twenty years I've been through the temp up
4:49markets get irrational we make many calls he constructs about stocks with
4:55Russia evaluations they do come back to earth
4:59report on the power of high expectations it speaks to even though stocks may be
5:07overpriced wrong time per GB model that the market would cease to exist
5:16the stock market cease to exist if it continually allocate capital to
5:20companies lost or destroyed value did burn adequate return on capital Harare
5:30see the weighted average cost of capital the market would destroy itself because
5:34the money would go away all the other hand the market rewards companies that
5:41create more value market can sustain itself so the sorter basics are part of
5:47nature thing those organisms those entities that create more than a take
5:53they prosper those that just take eventually die unless they can
5:59internet source of free resources basic nature also some basic math right we
6:08lookit return on invested capital this isn't just for sheer comfort for her
6:13financial companies for all but in this situation
6:16expressed fears seventy-two percent correlation between return on invested
6:21capital and valuation
6:25larger groups the S&P 56 percent correlation financials 69 percent
6:31correlation those of you have seen my prior webinars all the time I've even
6:39done on the fly it one of these presentations to show you how quickly
6:44his access our date it's not sexy it's not quite as much of a thrill you know
6:51what the rules lol the end of the day is long term
6:55made money but you did the right thing the real thrill is no you're not just
7:04the right things trying to distract by the noise because it's all around you
7:14this is not entertainment investing is not entertainment about protecting grow
7:19your wealth and we're here to help you do that the right way that's a big part
7:24we're doing we believe the purpose of the capital markets to allocate capital
7:28to its most efficient use I think the biggest reason the United States is the
7:33greatest country in the world compared it to her place years ago when we were
7:37not on the world scene at all what's the difference it's our ability to walk back
7:42to the freedoms of speech engine produces idea has resulted in a more
7:50efficient capital markets are more effective way to get more out of the
7:54resources we have today that we did back then
7:57lakes are cheaper oil wells are fuller we do more with less that's what drives
8:04promises there is a limit that
8:08are investing principles are based on technology to identify the best measures
8:23cash loves to show that the relationship between profitability stock valuation is
8:30not just into it but empirically supported that's what matters so
8:38governance it's about leadership capital budgeting compensation communication
8:45competition that focuses on the end of the day if you can earn more money on
8:54the small amount of money you allocate your peers you win if you can earn more
9:03money on every dollar of capital and your peers you if you can make 20 bucks
9:10for every $100 you invest in 1519 you wish
9:20questions anytime I've already got two or three but I'm happy to answer
9:25questions this is a pretty simple take away and one of the things I like to
9:30kind of two to back up this message
9:35you know that the research the case study on american express showing
9:40exactly how executives to drive value by focusing on maternal capital we've got
9:45models that provide scenarios on exactly how much value the company can create
9:53for its investors if it can focus on capitol natural guy creation of a car
10:00park all these are linked back to change in return we did the same thing for
10:08Oracle case study by the way in each case studies their latest models
10:18are you exactly how we calculate
10:22as you guys know I'm super transparent I want you to know how much work we do for
10:27you
10:29we're here to help you identify and avoid the worst ones

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