5 Ways Corporate Governance Affects Investors and Stock Valuations

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 that was a perfect
10:36day corporate governance is a disaster they set up compensation plans that
10:41rewarded behavior that was bad for sure they got paid executives got a while
10:51losing money that's why the stock is down a lot lower when we wrote our
10:58dangerous over 40 for that it's in the thirties now we don't think it's gonna
11:10get any better because we don't think the corporate governance just got better
11:16you know we started pointing out the issue because it was sore so widespread
11:20in such a high-profile June 2014 independent research is helpful while
11:31she doesn't help corporate governance find people who actually don't have a
11:36dog fight find people who don't get paid by the companies are supposed to cover
11:42kit ok
11:54return on invested capital is that something has to be done in or or
11:58created tomorrow so when accompanied you like kmi is spending a lot of money
12:13contributors and short-term right we see this in our analysis of free cash flow
12:18and in our training programs you know what my kind of trick questions is it
12:23better for free cash flow positive negative or zero and the answer is you
12:30never know kids there's no right answer to that because it's possible that means
12:38you got so much money left over you don't have a lot of places to put that
12:42you don't have a place where you get a return to present so you just keep it
12:48short hours if you negative when you're you're investing more money than you're
12:54making it maybe that's because you've got a lot of high return opportunities
12:57what it comes down to the end of the day is expectations right so
13:14how much the stock prices date in the amount of money they expect the market
13:22expects Kinder Morgan to make on its return on invested capital does not have
13:28to be immediate just has to be more than the cost that cow that's why this round
13:37fascist guests will also like it much less three or four years that's not the
13:44point the point is quantified the market's expectations
13:49quantify the market's expectations because if you don't have different
13:53expectations for the market should be investing right so the market's
14:01expectations for came by our Super Hybrid returns on invested capital the
14:05maybe all the benefit of that investment is priced at the low maybe it's not a
14:10look at the model you can see that the marketplace
14:19depreciation is only seven years not that long right let's take a look at
14:28what kind of future returns on capital are being back to when you look at more
14:32detail right across 56 percent with basically a return of capital for seven
14:40years but we can model difference in areas right margins
14:47protects the Martins tax rates working capital fixed asset needs
14:57you can forecast along all of those metrics
15:05so if you believe that the margins
15:19company will need less capital in future got pretty heavy we can model that
15:42largest a study needless
15:45returns save that
15:52returns historically it'll be seen historically unusual scenario capital
16:01going up compared to where these models outrage far things get bigger you know
16:08all that stuff don't worry about that probably don't want to have it twenty
16:11percent revenue growth rate in our usual scenario not that went down don't worry
16:18about how far out yet to forecast because let the market is already
16:21looking into our jobs get a sense of what the market is right so we'll just
16:27go with what consensus is years so the results of an interesting area what
16:55we'll see is you know what the stock looks pretty cheap but for those
17:00forecasts company only needs two years of profit growth we think the stocks
17:06were three what kind of expectations that mean that we are playing about the
17:11future performance of the company
17:12nine years ago 25 percent not that big improvement over existing returns ok so
17:22the answer to this question is in the business of making a good investment
17:27that is a good idea
17:30the return of capital is cheap stock and return of capital in the future doesn't
17:35have to get my child what's been the best if we were to redevelop
17:42conversation guidelines
17:43sure where to begin with you and return of capital may get a clock to make the
17:49best of bank their compensation or several
17:51bad company stock depends on what kind of executives lot of things you can do
17:58to stop in the short term at least back to go out how much executives got paid
18:03the Men's Wearhouse acquisition we did a special case study on this recently
18:08special offers the big story here was that meant warehouse executives turned
18:23down an offer to buy that $40 cash for a share cash rightly turn that down
18:32month later put together a deal that's now resulted in stopping at $18 a share
18:38the cost shareholders over one and a half billion and guess what exactly is
18:52going to be bonus
18:57warehouse is increased pay increased by under sixty-seven percent and 9.7
19:01million
19:09eight big bonus make more money investors lost money is an issue the
19:18issue is it like that and yes anytime you see a company trying to sell you
19:23when I get burnings get out of the way why I don't represent 10 profitability
19:29you don't care about probability talk about it
19:36trumpet bets on how can a company like MN st
19:51capital false-positive come still going up faster than economics so kind of a
19:58red flag so even though they got a really great business model is still
20:02going up fashion economic earnings and we think that's a little bit shake it up
20:06and valuations got ahead of itself a little bit too so you know we see a lot
20:11of the market these days companies focusing on a GAAP earnings focusing on
20:17gatherings to just try to do everything they can to focus you something besides
20:23cash and willing to overlook the ballot overlooked aspects overlooked
20:32acquisitions
20:33off-balance sheet they overlook taking on debt to fund negative operations
20:39operations they don't look at what you need to get to the real cash flows
20:46companies take advantage of their stock up to get a good bonus why not focus on
20:53returning to Mexico we make it easy available across over 3,000 companies
20:59part of the reason we're doing these case studies on things like american
21:03express and G one more is to show how our model works for consulting partners
21:13capital directly provides a more transparent link between corporate
21:16valuation was at 11 a.m. always been transparent but because over the years
21:26why because the whole lot easier sell stock of people don't know the rules
21:31properly used car salesmen don't encourage that looks good guys used car
21:43sale I'm just say they're not afraid to show you
21:51superficial stuff their forthcoming with their numbers into it makes sets thanks
22:00very much for joining me today
22:02attendants you have any further questions feel free to email us research
22:06new contracts to support a new contract dot com
22:09great stop got a danger zone idea every week long ideas not quite as off but
22:15they're coming out as well as well and then we've got great were mutual funds
22:22and ETFs were actually looking at the underlying holdings always talking about
22:27individual companies 2004 7,000 mutual funds and ETFs covered up companies that
22:35were able to cover all the holdings or majority portion large majority portions
22:40of the capital holdings of funds and therefore give you our rating on funds
22:47it's just like a rating on the stock
22:49aggregation of data on stocks that holds the ratings that we travel we did it we
22:57just went through all the potential so transparent a much better perspective
23:04not just an individual stocks also thank you