 Corporation, lecture two. Okay, I think it's time. Good afternoon everybody. Hope you're having a good time. Okay, summarize quickly what we covered yesterday. We talked about the fact that corporations, core corporations separate to some extent from the attacks on business, corporations in and of themselves have been under attack and much of that attack has come from this notion that they are creations of the state and therefore own the state some kind of responsibility. Also, this idea of limited liability, the idea that existence of limited liability gives shareholders something that is above and beyond what they deserve or what's right or what makes any sense. And again, that limited liability is a government creation. It's somehow granted to shareholders by government. And we saw the deficiencies in that and the implications of that. And really the fundamental there is a complete misunderstanding I think of what individual rights are and where rights come from rather than coming from the nature of man, the requirements for human survival. The view is that rights are granted by government. It is the king grants you rights to do something and now we just switched forms of government. Now we're constitutional governments. The founding fathers gave us our rights. They granted us the rights. But it's not, they're not, I mean, even the founding fathers didn't understand this fully but they had a much better conception of what rights are than what anybody today would have. And I think the key is to understand and I think this is probably self-evident in this room is that all business arrangements, agreements, innovations, forms, are market creations, are market creations. All government can do is interfere with those and by interfering, shape them and mold them. So we'll see and we'll talk about this and how government regulation causes business organizations to change their structure, to change in the way that they function. But government doesn't create anything. It doesn't create anything productive. All productive activity, all creation on the productive level happens in the marketplace. So all the law and the political system and the courts do is codify existing innovations. All they do is systematize. They simplify, okay? They don't create. And as we'll see as we go forward to the extent that they do more than that, they interfere, they obstruct, they remold the, in the case of corporations, the corporate entity in ways that the market probably would not have. So the way our corporations are structured today in America is probably not the way that the market would have evolved. Some corporations might be the way that corporations are today, but certainly not all of them. There would have been other models possible. But we'll get to that later today or tomorrow. The one other point under kind of the general introduction to corporations that I wanted to make was this issue of what is the purpose of the corporation? Why are corporations set up? For what purpose are they set up? And of course this is the big debate that's going on in the culture out there between those who advocate that corporations should maximize their owners, their shareholders' wealth, that their primary function is wealth maximization, and those who are growing influence, who believe that managers, CEOs, businesses should be there in order to create some kind of social wellbeing. They call it stakeholder capitalism. So that the company needs to take into account all the different stakeholders, and we'll talk about who all these different stakeholders are in a minute, the concerns of all the stakeholders when maximizing, when making decisions, when trying to optimize decisions. And again, the origins of this we've already talked about, the origins of this idea of social responsibility of stakeholder capitalism is the notion that the corporation owes something to the state. Of course, much more fundamental than that is what? What's the ultimate cause of this whole social responsibility and stakeholder and everything? Altruism, absolutely, it's the notion that it's greedy, it's selfish to maximize only the owner's wealth. It's what we should be doing is sacrificing the owner's wealth, sacrificing the wealth of the owner's for the sake of stakeholders, but you won't find anybody actually saying that. Nobody, altruists very rarely advocate explicitly for altruism. They always advocate for it in the guise of your own well-being. Why should we pay welfare? I mean, it's rare that people say because it's your duty to help the poor, what they say, well, if you pay the poor off in a sense they'll be less crime, right? Why should we have public education? Why should they take money out of our pockets because it's better to have an educated population, we all are better off. If the population is educated, we know if we had private education, half the population wouldn't get an education, right? So they try to disguise altruism always in some self-interested motive because at least Americans are still too self-interested, still have that sense of life, that they wouldn't buy into naked altruism. It's very rare that they would buy into naked altruism. From a lot of those lines, I find it strange that your main point is, or that you say from the literature is that people think that the government granted some things to the corporation and the corporation knows it back when that's not what's in the public, but at least not what I've seen. I've never seen anyone actually make that argument on the face of it and I don't get that if my friends or peers in school would say that that's why corporations should give back or anything like that. It's more altruistic. It's more the altruistic argument, but you see that the more intellectual the argument, the more this argument is used. You see it in the law, certainly in publications in law. You see it in the whole debates about corporate governance. Ralph Nato was making this argument. I see it when I, again, when I'm on Tom Hartman's radio show, it's a big argument he makes against it out of the left. You see it from libertarian circles. I see it when I debate people on CNBC from the other side. They often say, you know, but the corporation got these goodies, it owes something back. And the reason they use that is that it's semi-credible. I mean, if you don't know any better, you know, it sounds reasonable. The state gives, you know, gives these special protections to people and in exchange they get something in return. Now, I agree with you, it is not what the common person would associate with the main argument is the altruistic argument, but from a legal, intellectual, you know, the academic perspective, that is the main argument. And of course it fits in with altruism. They're all a mesh together. The whole role of the state is, the view of the role of the state is ultimately grounded in the altruistic view of morality. So ultimately, the cause of all this is altruism. You know, it's the rejection, even more than altruism, it's a rejection of selfishness. You know, because altruism is successful not so much because it has, and I don't want to get into ethics too much here, but altruism is successful not so much because it has something exciting to tell people, not so much because it is so convincing to people, but because it has been successful in portraying self-interest as such an evil idea. So that if you are a common person out there and you have two alternatives, be a backstabbing, corpse walking, lying, cheating, you know, SOB, which is what selfishness is, right, in popular vision, or be Mother Teresa, then you wanna be more like Mother Teresa even though you're never gonna be a Mother Teresa. Because nobody wants to be the lying, cheating, so on. But that's the only alternative the culture presents us. There is no other alternative presented, and I find when I talk to people about ethics, that when you present a vision of irrational egos to people, even though they don't understand it fully and they don't grasp all the implications and everything, they are really intrigued. I find really positive responses because they've never heard of this. You mean you can be self-interested and moral at the same time? That's cool. Because most of them wanna be self-interested. They care about themselves in their own lives in particular ways. Now, you know, they haven't heard how hard it is, you know, in the sense of they need to think and all that, but they find the idea, right? They find the general idea of a rational self-interested person into the morality is really an interesting idea. So business and a portrayed, corporations are portrayed as, you know, movies and our books and everywhere as the corpse walking back stabbing, lying, stealing. And of course, once in a while when a CEO actually does that, then it's blown up that all CEOs are like that, just reinforces what the altruists have been telling us all along about selfishness. You see, you can't trust any of them. It's a profit motive. Profit motive drives them to do these things. And yeah, we only caught three of them, but believe me, every CEO in America has the potential to be one of these cooks. Why? Because they're after money. Because self-interest leads to that. And that's how the altruists can take over. And that's why after every one of these crises, who's penalized? Well, yeah, the people who committed the fraud are penalized, but then every CEO in America is penalized. Why? Because they're all selfish, therefore, they're all potential crooks, by definition. So that's kind of, that's the maw argument. And indeed, let me just, let me just quote Nader in terms of, again, referring to the state, to his view of the state. Actually, this is a Nader. This is Professor Robert Dahl. I think he's a law professor. Today, as it is absurd to regard the corporation simply as an enterprise established for the sole purpose of allowing profit-making. One simply has to ask why should citizens, through their government, grant special rights, powers, and privileges, and protections to any firm, except on the understanding that its activities are to fulfill their purpose, i.e. the purpose of the citizens and the government. Corporations exist because we allow them to do so. And as a consequence, they owe us something. We now have as a consequence of this kind of thinking of the altruism combined with this legalistic type of thinking, we have corporations issuing social responsibility reports. I don't know if you've seen these, the Walmart did one, where they list all the stuff they do that's good for the environment, and they list all the benefits they provide their employees and all the community service that they do, and it's becoming a trend now, more and more companies are now issuing corporate social responsibility reports together with their annual reports and before their annual meetings. And there's no defense. Again, the corporations have no defense, and they have no defense because they bought into both these ideas. On the legal political side, they bought into the ideas that they are creation of the state. On the mall side, they bought into the idea that selfishness is a bad thing and that they can't defend their own self-interest. They want to, in some sense, because they are doing it for the money and they know that, but they can't justify that. They cannot justify that. So what happens? What is, what happens when you try to run a company? And this is kind of the practical argument. What happens when you try to run a company for stakeholders? What, anybody, what are stakeholders? Give me some stakeholders. Customers, shareholders. We've got customers, business shareholders. Vendors. Vendors. Regulators. Regulators. Computers. Employees. Trees. Right. Trees, yeah. Trees. Trees plus owls. Employees. The wounds. Employees. Employees, yeah. Community. Employees. You know, they count the community, whatever that is. The community is a. The general vicinity, the board. And, yeah, community. What's that? The environment. Yeah, that was a tree. Trees. Trees counts as a fine. I understand it for me. What's that? Well, that becomes a really interesting issue on how you define community. I always challenge my students and say, well, how do you want to define just the town? That sounds like a little isolationist. What, you're the country? Well, that sounds a little xenophobic. I mean, you're a citizen of the world, right? Why not define it in terms of the global community? Africans. I mean, you could make the suffering of the world one of your stakeholders. So, I always, what I do with my students is I tell them, okay, you now have to make a corporate decision to try to maximize the wellbeing of this list of stakeholders. Okay, and let's say move your plan from Minnesota to Mexico, or to China, doesn't matter. Okay, how does that affect your customer? Good or bad for your customers? Well, the basic assumption is that from a financial perspective, a bottom line profit perspective, it's good for you to move, let's say to Mexico, so we take the property rights issue up. So, you're moving to Mexico, it's gonna be long term, it's good for shareholders, it's profit maximizing. Okay? So, is it good for customers? Lower prices. Yeah, it's probably lower prices or better quality or better something because where do you get profit from? From having a better service or a better product or something or cheaper. What about for your shareholders? Well, we said that's good. Well, what about for your vendors? Depends. Well, it depends. Some of them it's good and some of them it's bad and then you get into a discussion that we care about the new Mexican vendors because they're gonna be new Mexican vendors. You know, suppliers depends. Same deal. Some good, some bad. Trees. Isn't profit bad for our customers? I mean, we're making it by charging them more than we could. Well, but prices might actually drop because I'm moving to Mexico, I could keep my profit margin and still offer them lower prices. Likely, I would. Environment. Bad. Probably good because I'm shutting down production right here, buddy. But bad because you're building a new factory in Mexico. But bad in Mexico. So again, it's a question of whether we count the community is just here or the community is including everybody. You can see the principal employees, negative for those being laid off, positive for those not being laid off, positive for Mexican employees. If you care about Mexican employees, they always have a challenge about whether they care about Mexican employees or not. And community, you know, whatever that means, you can make the same kind of arguments. Good for the local store owners. In Mexico, bad for the local store owners here because, you know, but then of course, maybe the local store owner will close their store here and go somewhere else where they'll make even more money. You know, regulators, who knows. They usually have government. They usually have government because taxes and taxes would go up because you're becoming more profitable. Okay, well, make a decision. Yeah. Yeah. Utilitarianism. I mean, that's right. You can't. There's no way. So what happens? What actually happens in a business to try to do this? What would happen in any social group where you try to do this? In existence. Yeah, whoever screams the loudest. Whoever bangs on your door the loudest. Whoever's most visible. Whoever's most present. So it becomes what? It becomes what Washington is today, which is? Paul, pressure group politics. And who's gonna have the most Paul here probably? Your local employees. And maybe the local environmentalists, right? So, i.e. decide who knows. And what does this do to productive endeavor? What does it do to the time of management and how management spends its time? Waste. Waste. I mean, it's complete waste. You're now become what? What have you become? Versus a productive focused CEO who's trying to maximize production and profitability. And so what have you become now? Starts with a P. What's that? A politician. A politician. You become a politician. You become a politician. And we'll talk about the fact that we already seen. CEOs become politicians. And as a consequence, and even call themselves politicians, if you talk to the CEO of Proctin Gamble, I've seen interviews with the CEO of Proctin Gamble, he says, my job is primarily politics. My job is primarily political. Because of this, and because of these guys, the regulators. That's 90% of some of these CEOs' jobs, is to manage the stakeholders and to manage government. And if you're a global company, you have to manage multiple governments and you have to handle them all. So from a mall perspective, this is bad, this is altruism, right? From a practical perspective, it's a disaster. You can't focus on production, you can't focus on increased efficiency. There's no way to run a company this way. It's a complete disaster and a complete failure. And of course you see that in a shrugged way. 20-century-old company, when they make it into a political process. When it's about the employees voting about everything. They turn it into politics rather than business, rather than production. They turn the motive into an altruistic motive rather than a self-interested motive. Now, of course, linked to the altruism and to the self-interest is the issue of property rights. This is a clear violation of property rights to run a company this way. Who's property rights? Shareholders, who are the owners? Were the legal owners of the company? And again, it's useful when you explain this to people, say, if you work at a grocery store, and you know mom and pop grocery store at a corner thing, and you're looking at what do they expect you to do when you're the night manager, right? They expect you to make money for them. That's your role, that's your job. Not to hand out the food to the local community because they're not feeling well. And everybody gets it on the local community store model. Nobody thinks, yeah, I as a night manager can take into account all these other groups and hand stuff out and better through it's big business, somehow the model somehow has changed. And this is where it becomes, you know, shareholders and our quite owners, it's the state is involved, you know, it's a lot of money, it's not just a little money, they don't need the money, size in this case matters for the way people perceive these issues. At the grocery store level, people get it. At the big corporation level, they don't. How would you refute the argument that because this kind of behavior is not, at least in all cases, legally mandated that shareholders know what they're getting into when they make an investment and have a choice simply not to invest in companies that are being run this way? I mean, I think that if a corporation sets up and makes public explicitly that they are not in business to make money. Profit is, yeah, they wanna make profit but it's not the key thing. And they have that explicitly stated. But where they mean it, because a lot of corporations, they say they do the other way around, right? They really are for profits and they inter-appease all these guys, they stick some corporate social responsibility into the, not into the bylaws, into the mission statement. But if it's clear, like, for example, you have nonprofits, right? So the nonprofit agenda is not to make money. But I think it's deceptive, particularly in a world today where everything's mixed, right? They stick it in as pretense, but in some cases it's not. When you invest a corporation, the implicit assumption unless there's massive evidence to the contrary is that this is a financial enterprise focused on making money. And I think, I actually think and I, you know, I don't know what the lawyers would think of this, but I actually think that you should not be allowed, shareholders, once the corporation is set as a financial making corporation, shareholders should not have any say or any ability to change the corporate charter to eliminate, to reduce that. Because I think in that case, the 51% who vote for it are violating the rights of the 49% who vote against it. So I don't think a majority should be allowed to change the corporate charter. To be, for example, they shouldn't be allowed, in my view, to say at shareholder meetings they have these provisions. For example, to say, we should be saving more trees. The corporation should be putting aside money to save more trees. And let's say 60% of the shareholders vote for it. I think the court should throw that out. I think the only thing shareholders should be allowed to vote on. Issues pertaining to better ways to make money. So they could say, by saving more trees, we can make more money. That would be legitimate if you could make that up, right? But, oh, you wouldn't do that or some strategic decision. We should look into selling the company because now's a good time to sell. That should be something shareholders should be able to vote on. But they should not be able to vote on anything that undercuts the ability of the company to make money. Because that's what setting up a for-profit corporation means. It means that it's for-profit. And you're violating the right to the minority of shareholders who vote against it if you allow a majority to rule that way. Now, that's kind of... Is your check engine light on? Don't ignore it. Stop by O'Reilly Auto Parts today and let our professional parts people scan your vehicle for free. We'll retrieve the codes, discuss possible solutions, and even help you find a professional technician if needed. Visit O'Reilly Auto Parts today for our free check engine light help. O'Reilly Auto Parts. Better parts, better prices, every day. O, O, O, O'Reilly Auto Parts. Yep. What about this argument that I've heard, which is that in today's culture, they have to, at least as window dressing, save some trees and do this. Otherwise, they won't make money because they won't be popular with investors. I think that's a... I don't believe that, but I think you could argue that. I mean, I don't think... I think, yes, that there are companies that think that. Whether it's true or not, I don't know, because I don't think enough companies have tested it. And there are companies who play the game a lot less. You know, a company like BB&T comes out and says, we're not funding eminent domain issues anymore, and they get more business. So it's not clear to me that if a company stood up and said, no, we're not going to play this game anymore, that they would actually lose business. And it would depend on the industry they were in. It would depend on the geographic area they were in. Maybe it would depend on a lot of things. But I think that's debatable. I don't think there's a definitive answer about that. Yeah. It feels like a factor, is it? Does it share complete state control, eventually? Because if you compare that to something like France, where a local bakery can't even make a baguette that's in a different shape than the French baguette, they're not committed to do it. And all the partaking is really done by the state, and the owners are eventually slaves. There is no question that the ultimate agenda of people, the people who are, you know, the intellectuals behind this, the ultimate agenda is state control over business. There's no question whether it's primarily in the form of a fascist type of control, you know, where there's the pretence of private ownership. And when we see that in America today, we're moving to that model already, where there's the pretence of private ownership, but you can't do much with the private assets that you own. You know, how many of us own property where we can't even chop down a tree without getting the local dictator's permission or the local 51% of the population's permission or to cut down a tree, at least in California. You can't cut down a tree in your own backyard without getting the government's permission to do so. Okay? That's the form of fascism. That's our private property. That you're leasing the property from the government, you know, under certain conditions. Because that's the main thing. I'm gonna go talk to you, put it in the video, where the Biden and Dan are staying working for him, generating problems, you know, not allowing them to use the local health. Right, so we're actually putting into the whole race to get all that extra people to start moving out. You know, hang on a minute. There's something that you can start feeling like to share with us, but you've got great faith in the government and you've got a lot of time to go. And you know, they're coming along, they're coming along, they're actually coming along with you. Yeah, I think that's right. And of course, they don't pay them enough because we've got all these issues of CEO pay and so on. That's, you know, that's more and more of an issue. You know, if you don't compensate your management team enough, they're going to leave. But of course, there's a lot of pressure not to compensate them enough. And the question is, can they leave too? And we'll talk about private equity as the, you know, kind of the consequence of these kinds of actions probably tomorrow. So yeah, so in my view, corporations are not democracies in any sense. Shareholders have a right to control the activities of corporation only, in my view, as they relate to their business activities, only as they relate to their efforts to make money. That's why we buy shares. Now again, today, in the world today, if you explicitly put on the banner, we're not interested in making money, fine. You know, you're a crappy corporation. What is going to happen? Yeah, people will leave, stock price will drop, and then what happens? Chapter 11. What's that? Chapter 11. Yeah, long-term, you've got Chapter 11 possibilities, short-term, you've got takeover possibilities. This goes back to private equity question. You can come to somebody in, buy up the company and kick out the stupid managers to put that sign above the door, right? I mean, again, in a free market, that would be a lot easier than it is today. Today, a lot of these management teams are protected, even when they don't do a good job. So this is both immoral. It violates the property rights of the shareholders, and it's impractical. And it's just another great illustration of the moral is the practical, the immoral is impractical. And one of the things I like to ask my students is, okay, so if you're trying to maximize stakeholders' well-being, you kind of take all this into account, you really care about all these people. But on the other hand, and we ever have shareholders, and that's only one word, there's nobody else we care about, and I go, let's say you're 100% dedicated to maximize shareholder wealth. All you care about, all you care about, the only thing you think about is maximizing shareholder wealth. So obviously what you do is you chain your employees to their machines and you whip them three times a day, right? And you never pay your bills to the suppliers, you drag them out as long as you get, all you care about is shareholders. And the students, particularly if they've ever been in business, go, no, no, no, we can't do that because then the employees won't be gonna say, yeah, so how do you treat your employees then if you're trying to maximize shareholder wealth? Well, and you have to treat them well, you have to compensate them just based on how productive they are, and you have to treat your suppliers well because that's how you maximize shareholder wealth, and so on. So yes, with single-minded profit maximizers, with single-mindedly trying to make as much money for shareholders, but in an effort to do that, you have to treat everybody else well, otherwise you're not gonna be able to do that. Yeah. I was thinking of an analogy, like as a person in my own life, my own goal is not to maximize my own wealth, right? It's, I have a central purpose that has more to do with choosing a fulfilling, rewarding career. Is there any analogy there for the corporation or is it because of the separation of ownership and control? The corporation should be dedicated to the owners and not to those who control it and who wanna kind of love their work and enjoy what they're doing. Yeah, so why are shareholders shareholders? We are shareholders. Why are shareholders shareholders? Are they shareholders because they want fulfillment? Are they shareholders because it's cool to be shareholders? No, I mean there's only one purpose, and the shareholders wanna maximize their own well-being, their happiness, right? And that involves wealth, but it also involves a lot of other things. And in maximizing their happiness, they've taken the wealth parts and they put it here. And they expect in this format to maximize, to help maximize that portion of their happiness that is attributed to wealth. I don't know if that's the right way to say it, but you get what I'm, so that's the purpose of the corporation. Now, if you own the corporation and you're running it and it's yours 100%, right? And you're in control, then you're maximizing your happiness, which might involve giving up some profit because you wanna take a long vacation somewhere. But you don't owe anybody else anything. But if you're a manager of a, you're their agent to do what? In what capacity, a lawyer is your agent. When you hire a lawyer, that lawyer becomes your agent in what capacity to do what for you? To help you win a trial, right? To protect you from persecution. That's his job in the context of your life. What's the job of a CEO? What responsibility agent, you as the shareholder, have hired him to do what for you? To make you money, nothing else. Not to make the world a better place, not to enhance trees, but to make you money. That's why shares are traded in financial markets, not on, I don't know what other markets you would have. You said you think a lot of corporations are essentially digging theirs and other corporations own graves with things like the Gap Red campaign and stuff where they are making a profit but they refuse to admit it. They focus instead on, look at what we're doing for the community. Businessmen are their own worst enemies. There's no question. Businessmen are digging their own grave. Now, you could argue the point Amy made before that they have no choice to some extent. That is that if they stand out for themselves, they're gonna be so hounded and destroyed by the regulators that they can't do it. But they do worse than not just standing out for themselves. They actually advocate for their enemies. And more than that, if you go and you look at the giving that the charitable givings of these corporations, they give to every anti-business group that ever was invented, they get most of their money. Exxon gives to environmentalist groups. Walmart gives to environmentalists and union types and pro-workers' rights or whatever. They give to all those groups. They give to universities who are their biggest enemies. Anyway, right? So yes, they are their own worst destroyers. There's no question. It's not their war, it's just for them to stay in business. And in fact that means that they're standing out in control because you can't get anything done without their agreement. I'm not sure that it's true that they have to bring them on board, but they don't have... It's not management, they do it as expedience. They think they need to do it as expedience. I'm not convinced they really do, but they think they need to do it. Absolutely, you're seeing them bringing environmentalists on, workers' rights people on. You're seeing them completely capitulate to these pressure groups and bringing them on to the management team via the board of directors. I mean, Walmart hired a big shot in environmentalists now to come and join them as a senior executive. Yeah? This is going to say, you get to see the people who are very good in travel. You get to see them in health care. Because of Medicare, U.C. operation, I've got to take care of their ability and their operation. They've completely taken more pride now because they have to show film on regular basis only employees called ethics. They're compliant, so what is ethical is to follow Medicare and regulation. So they're completely taking more pride in what is ethical and what is legal. And you can't even think about it. They're completely struck by the net because they have to follow Medicare. No, that's right. And you see that, for example, in the financial industry where you have to take ethics courses for compliance to get certified. And all the ethics courses are either just courses on regulations and what's regulations you have to follow and how, or pure altruism. So there's very little, you know, a rational ethical approach to business out there. So what you're teaching your executives while you're teaching them about all these regulations is all the anti-business ethical theories that are out there that undercut your business executive's ability to defend themselves. So it's multiple layers of chopping, you know, cutting off the feet of the executives time and time again. Yeah. Would it be valid to add, on the stakeholders list, also potentially your competitors? I've seen some of the airlines. Oh, yeah. All their small... Because anti-trust. I mean, anti-trust brings your competitors right into one of the stakeholders. You know, just ask Microsoft that invested money in the late 1990s into Apple to keep Apple alive because they needed a competitor. Because if they wouldn't have a competitor, what would happen? They'd get even worse anti-trust problems than they did. They needed to be able to point to somebody and say, look, there is competition. They kept Apple, I don't know if they kept them alive, but they really supported Apple during the really bad years in the late 90s before, you know, run-to-time jobs came back and they, I can't remember what sum of money, but it was significant a sum of money that they gave to Apple. $150 million. It's $150 million. That's a significant amount of money. In the 90s, and Apple is not doing well in those days. So, yeah, competitors is up here. Anti-trust forces that on you to count the competitors as one of your stakeholders. And note that when businesses don't take the stakeholders into account, as they did in 100 years ago, okay? As many businesses still don't today. How do we get the stakeholders into equation in spite of that? Through laws. Through laws. We get them regulated in. So, let's say you have a businessman or American business said, we don't care about stakeholders, we only want to maximize shareholder wealth. The pressure group said, okay, well, we'll skip over you. We'll just go to the government and force them to pass. Laws that provide for benefits for your employees and say that you can't fire them without whatever. That say that they can sue you if you treat them badly. So you get employees becoming a stakeholder whether you want to or not. The government has forced them down your throat as a stakeholder. You get competitors as a stakeholder, not because you're really taking them into account, but because the government forces you to take them into account because if you don't, you'll get sued for anti-trust. All the environmental regulations. And what are the people who want the regulations passed say? They say, look, if the businessman did the responsibility, if they behaved appropriately, if they treated the employees nicely, if they treated the environment well, then we wouldn't have to pass these regulations. These regulations are only there because you businessmen are so short-sighted. You won't think about these big issues. It's your fault. And they're doing the same thing with CEO pay right now, right? They're going around and they're saying, look, what we really want is for you, businessmen to accept that shareholders should vote about CEO pay. And of course they're going from corporation trying to get this passed by shareholders and shareholders are not passing it. So they're saying, look, you shareholders in management, you're too short-sighted. So they're going to Charles Rangel, who is in Congress, and they're passing laws that are gonna require shareholders to vote on CEO pay. And I'm debating this lady a couple of weeks who says, I'm all for capitalism, is her claim. But look, the system's broken. We're trying to do something that's good for shareholders and shareholders don't want it, so we're gonna force it. So we need to use the government and not to force them to do what's good for them. And they do that a lot. So all these things where there's a pressure group and they can't get management's attention, they turn to politics and they put the pressure on the politicians and as a consequence, we get the regulations. The force managers and whether you, today, every manager who's focused on maximizing shareholder wealth is really doing stakeholder stuff because he has to think about all the laws, all the regulations that dictate all this other behavior. I know CEOs who've told me that they spend up to 80% of their time dealing with legal and regulatory issues. 80% of the most productive people in the country's time on legal and regulatory issues instead of on finding better, more efficient ways to produce. I mean, as well as corporations have done in this country, as well as the US economy's done, just imagine, just imagine what potential there is if you freed that time up, just the time. Put aside everything else. Just give them that extra four days to be who they really are, right? Giants of innovation and management. If you let them be that for another four days, imagine the kind of progress and prosperity that would be created in this country. Imagine the returns on the S&P 500. That's, I mean, it's hard to tell people because there's no parallel universe where this happened and standard of living is double what it is today in the United States, which it would easily be if we hadn't had all these regulations over the last 100 years. You see, you can't show people what they're missing. That's hard, right? Stop by any of the 133 Los Angeles area O'Reilly Auto Parts stores where you'll find everyday low prices on the parts you need to keep your vehicle at its best. Our guaranteed low prices ensure you're always getting our best deal. In fact, we'll match any auto parts stores price on any like item. O'Reilly Auto Parts, better parts, better prices every day. Oh, oh, oh, oh, O'Reilly. Okay. Do you think CEOs now really are those productive people anymore or is it like politics where they're just, you know, who's going to be attracted to being a CEO is changing. Let's start, we'll talk about that. Okay, so we've got these corporations. We know what they are now. We know some of the criticism against them. We know what their purpose is. Their valid purpose is to maximize shareholder wealth. The sole purpose of a company is to make money for its shareholders. That's what they should be focused on. That's the essential characteristic. Let's now turn to this question that we've kept kind of skirting around which is the question of separation of ownership control. Maybe the most influential book with regard to corporate governance is a book published in 1932 about the separation of ownership control by Bull and Means. Bull is B-E-A-R-L-E and means M-E-A-N-S, who are law professors. And this is their argument. And this is at the heart of much of the academic, at least, critique and at the root of, you know, the semi-legitimate appearance of the criticism of much of, for all the issues from, you know, the Imperial CEO to CEO pay to management corruption. And this is the explanation that is the most viable that people use. Look, we've got a real problem with corporations. You have a situation where you've got millions in some companies, millions of shareholders and other companies, hundreds of thousands of shareholders dispersed. Nobody has an economic interest to really exert control over what happens. So there's clearly these shareholders have no control over what the company does. The fact is that boards of directors who are meant to represent shareholders, who selects the members of the board, who actually gets people to serve on the board of directors. What's that? The founders, the large shareholders. Well, after the founders are gone, who would get, who gets the board members to serve on the board? The CEO. Yeah, the CEO, right? There often is golfing buddies is the story and they often are the golfing buddies. Let's not whitewash this. The oftenest friends are people he knows, the people he has influence with. Sometimes he will serve on their boards. There'll be other CEOs and they will serve on his board. And the board really becomes, behold, and not to the shareholders who it is supposed to represent. But since the shareholders have real power over this board of directors, because to get 51% of the shareholders together to replace the board is really, really, really hard because it's such this first ownership that they are really, this board is really beholden to home, to the CEO. So what you get is a CEO who controls maybe a multi-billion dollar corporation who can do whatever he wants because the shareholders are sort of fused to do anything about it. And the board really as long as they stay palsy with the CEO and as long as the CEO doesn't upset them on the board that he's sitting on, you know, they're all buddies, right? So they're not gonna get excited about anything the CEO does. And as a consequence, what happens? The consequence is that the CEOs make decisions, corporate decisions that are not shareholder wealth maximizing. As a consequence, the CEO makes decisions that are what? CEO maximizing. CEO well-being maximizing. So he might take on less risk, for example, and the shareholders would like to take on. Shareholders like risk. Why do shareholders want any given manager to take on lots of risk? Relatively speaking, because they're diversified. They're in a lot of companies. Their risk is controlled. But why doesn't the manager like to take on risk? This story goes, right? Because if he fails. Because he works for one company and if he doesn't do well, then he loses his job, which is a huge hit. So he doesn't wanna take on as much risk as shareholders, for example. Now, shareholders would like to get dividends. They would like the CEO to approve lots of dividend payment. What does the CEO want? He wants lots of cash around. Why? Reduces risk. If he has lots of cash around, he can handle downturns. Shareholders would like the CEO to run one business and run it really well. Because if they were diversified, because they're already diversified, right? They have diversification built in. It's cheap for them to buy a grocery store, jet engine company, a finance company, some other company. What does the CEO want, according to the story? He wants to diversify. Why does he want to diversify? Because it reduces his risk of ever losing a job. Because if he owns a conglomerate, which has a grocery store, a finance, jet engines, refrigerators, whatever, then if one industry is down because of the economy, another industry might be up and over time, what's the likelihood of conglomerate goes bankrupt? Very small. That's a fact. It's not gonna grow very much. It's not gonna be very profitable, but it's not gonna go bankrupt. It's just gonna be kind of okay. And that's supposedly good for the manager because it reduces, again, his risks. So we see how the interest supposedly of the manager and the interest of shareholders are not the same. They're diverged. Separation of ownership and control. Bill and me tell us is there is here a real problem. And as a consequence in these big corporate businesses, what we see is managers paying themselves too much money. That's the whole issue of CEO pay, doing whatever they want with the assets of the company in order to cushion their own. They buy penthouses in New York and vacation houses. What was the guy from Tyco, $2,000 shower curtains for their homes, all at the corporation's expense because they're trying to maximize their own wellbeing, supposedly, and of course, this is at the expense of shareholders. And this issue is viewed in finance and economics and law as the central problem with the modern corporation. And every one of these crises, every one of these problems is viewed today as proof that this problem really exists. The shareholders and the managers of these days. What I always find interesting is the people who really push this really advocate for this or also the people who push stakeholder and they don't really care about shareholders but put that aside. There's a lot of finance professors who do a lot of research on the separation of ownership control. Who do, who recognize that the real purpose of a corporation is to maximize shareholder wealth and they say, but it can't work because there's this divergent. Now, first there are a couple of fallacies here that I want to get to and then I want to get to the parts of this that are legitimate and are real problems and why those problems really exist. The two fallacies are the notion that there's an alternative to separation of ownership control. The notion that this didn't come about because this is an efficient solution, which I think it is. The fact that the lack of recognition of this as a form of division of labor. I don't believe the issue of separation of ownership control is a problem, I think it's a solution. Now, it creates certain issues that need to be resolved but it's not a problem in and of itself which is what Boland means to say. This is the death of capitalism. This is big with them. And this is why Nader and many, many other people believe that the state has to come in to control these things because otherwise what will happen with the corporations? The CEOs will steal all the wealth from the corporations and there'll be no production because all the CEOs care about is supposedly padding their own pockets. So in my view, this is a solution. We talked about this yesterday. This is a solution, this is a division of labor. Some people have capital, they don't wanna own, they don't wanna manage. Some people wanna manage, they don't have capital. If you have both, you could start your own business but if you don't have both, this is an efficient allocation of responsibilities, of duties, providers of capital, managers. And indeed, this evolved in a free market, in a market that's very sensitive to what's efficient and what's not efficient. And it has survived this division of managers for the last 100 years and as we talked about corporations have thrived. Production has thrived with the separation of ownership control. So it's questionable to begin with how big of a problem it is given how well corporations succeeded. I was just gonna say just, I think last week or two weeks ago, Yahoo's CEO actually just got booted out for this very issue. So the point that you can't get rid of CEOs is we'll talk about that tomorrow. Whether it is the whole CEO pay and the whole boards don't control CEOs and what the empirical evidence actually suggests about both those issues, we'll talk about that. Actually, CEO turnover kicking out CEOs. The rate of turnover right now is the highest that's ever been. You may be it's too high. CEO average, CEO tenure right now is six years, which is not very long at all. It's up from 10 years, just 15, 20 years ago. It's down from 10 years, not that long ago. You know, this is, we'll talk about this, the reality here. That's true. That's one of the fallacies is this idea that we all deserve, a certain type of company that somebody has put together and that we can't make those evaluations about who we want to buy, which we don't want to buy and so on. That we just should be able to blindly buy the market and get the results that we want, you know? Cause, effect without cause, you know? But what is at the root of this notion of, you know, the separation? You know, it's something I think there's a real objectivist contribution here that can help us resolve this issue. You know, what are they claiming fundamentally is at the heart of this? That there is what? There is, yeah, that there is an inherent conflict of interest between people. That there is an inherent conflict of interest. That the self-interest of the CEO is what? Is somehow to get away with stuff? Is to, ultimately, the inherent self-interest of the CEO is if you can get away with it, like steal, cheat, backstab, do all that stuff. Cause that's our vision of selfishness. But if the CEO is a rational man as we understand it and he takes the job of a CEO of a publicly traded corporation, what is the conflict of interest? Put aside whether he has shares or not. Put aside all the incentives we create and can't create. Put aside that if you took over running of a company and you had a million shareholders, what would you try to do? Well, try to do a good job, which means try to maximize shareholder wealth. And you would want to own shares in the process because you want to benefit from the same thing. So you'd want to be compensated in a way that aligns your incentives with the incentives of shareholders. But at the root here is this notion, and by the way, the market does that. The market aligns those incentives if it's left alone. It's the perversions of the market that creates the misincentive, the disincentives. It's this notion that's so inherent in altruism and so inherent in our ethical system that human interests are in conflict and that you need to create artificial systems to put them into alignment that is at the root of the separation of ownership and control. Rational people don't have these conflicts. And if they are potential conflict, then there has to be a simple market resolution to them. And it should be easy. It shouldn't be that hard. And indeed it is, as we'll see, easy and not that hard to resolve these issues. Yeah. Do you think it's even deeper than altruism and that man who's been here at the Evo and if he's left alone he's going to do evil things? Do you think he's going to have to complain? Yeah, it's absolutely. It goes back to the view of man whether it's Christian view of man which is the original sin. We're basically sinners and our own, our self-interest is sin or whether it's a Hobbesian view of man which is a Hobbesian and a Machiavellian view of man where our self-interest means what we're animals look. Tear each other apart. If only he left alone. Absolutely. That's what this is. The manager will tear the shreds, the shareholder if he only had the opportunity. What we need is the government to step in to make sure that the manager doesn't misbehave because the manager can't, the manager has no pride in his job, pride would never count, right? Moral responsibility shareholders would never count. You know, not to mention there is a fiduciary legal responsibility to manage the company, to manage my shoulder. And of course we couldn't trust our market, i.e. shareholders, if there was a problem to fix it. Because if you believed in the market, if you believed that the rational self-interest of all the participants in the market is not in conflict but would find resolutions where potential conflicts can exist, then you would say, yeah, I can see there's some issues where the manager might wanna do things that the shareholder wouldn't, but if the shareholder doesn't, wouldn't the market find a way to give the shareholder's tools to control their behavior? But if you don't believe in markets, you're never gonna let that happen. But if you believe, as objectivists do, that the interests are inherently aligned, that rational people don't have conflicts, and that when there are potential conflicts, they can be resolved in a rational way, then this doesn't become a problem, an inherent problem. It becomes an issue of, cool, how do we deal with this? What are the tools the market provides us to take care of these issues? Clearly they are bad CEOs. What do we do when we have a bad CEO? How do we deal with that? How do we handle it? There are going to be immoral people out there. How do we handle it when we get an immoral CEO running a company? Not to maximize shareholder wealth, but to do something. Then it becomes an issue of, okay, there gonna be some exceptions. Then not everybody's gonna behave as a rational, self-interested person. How do we solve the problems when those problems arise? And that's, as we'll see, I think, relatively easy to do. If that's your framework, but if you start with, this is a huge problem. We might find one or two CEOs who are gonna behave, but everybody else is gonna be a crook. Now so we have to find a legal structure to try to manipulate this so it doesn't become a problem. Then you start with the big regulatory solution instead of leaving the markets to solve the occasional problems that happen when they happen. So you're talking about the major confusion between what if the CEO comes in? Yes, I mean there's confusion between political power and economic power on a number of different levels. But their claim is the CEO won't go away when he fails because those who are interested in getting rid of him, i.e. the shareholders, have no ability to get rid of him. It's too expensive for them to organize to get rid of him. And by the time, let's say they do organize to get rid of him, by the time they do so, he's already destroyed so much wealth, it's bad for the economy. Wealth being destroyed. So it's also part, a lot of their thinking is around what's best for the economy. What's best for the economy is that their interest are always aligned, the shareholders that managers are always constantly maximizing shareholder wealth. So if we can create structures in which to force that, that would be great. If you look at an economy-wide perspective, rather than look at a property-wide perspective, it says shareholders need to take responsibility when there's a problem over their own asset, over their own what they own. It's their job. Somebody else's job to make sure that the quite economy all functions efficiently. Now we'll see that they attempt to resolve the separation of ownership and control, create more problems than solutions, of course, as we know, most of these government regulation types, that's what happens. And indeed, not only that, but the very way in which American corporate law today or American regulatory system is put in place creates the problems. Not so much the regulations to try to solve the problem, but the very nature of the way we set up business in America because of the regulatory constraints we faced causes problems that don't need to exist in a true free market. Okay. One of the big issues that is raised is this issue about Board of Directors. Cause what is the purpose of a Board of Directors? Yeah, Board of Directors is supposed to represent shareholders. If shareholders don't want to vote on CEO pay, they don't want to vote on every business decision. They don't have the resources to monitor the CEO and monitor all his behavior. So they delegate that. They elect a Board that serves as their representatives with managers. So the Board selects the managers, then monitors them, they're the ones who set the pay, they're the ones who choose the strategy, they're the ones who do all that because the shareholders don't have the expertise to do that. That's not why they're buying shares. They're buying shares for their financial return, not to manage a business. So if you could start from scratch and you could choose your ideal Board of Directors to represent you, your shareholders and corporation X, who would you, who are your ideal shareholders? Oh yeah, I mean Board members. Other productive business people. So other productive business people, okay? People who know that business. People who know the business and who know business generally, who know the principles of business that might be in that business. A knowledgeable person who owns a lot of shares, just. Yeah, how about somebody representing shareholders who's actually a shareholder? That would be cool. No, because if somebody on the Board, if the people on the Board own shares, then what do they want to do? What is their interest? Yeah, and that's the same as what I want to do as a shareholder, okay? So we want shareholders, we want business people who are knowledgeable in the area and knowledgeable generally about business. Another executive from your own company? So yeah, the CEO or maybe one other executive, somebody who's very knowledgeable about this particular business. Perhaps a banker. What's that? Perhaps a banker. Yeah, a banker, again a banker would fit into somebody knowledgeable about business, somebody who is well connected within the business community, knows something about kind of the macro state of a business community. The council. Yeah, particularly today. You know, as a county becomes more complex because of all the regulations, you want somebody who can understand, yeah. Someone who might understand the customers. Yeah, potentially somebody who might understand or somebody from the customer base. I hate to say this, but what about a lawyer? Again, today you'd probably have to have a lawyer on your board at least one. I don't know if I'd deal with you anymore. I'm definitely a professor. Yeah. Yeah. Yeah. He's definitely a professor. Not in an ideal world. You wouldn't need it. You wouldn't need it. Okay, so try to pick my ideal board of directors. They would be composed of, one, shareholders. Everybody on my board would own shares. Some of them would represent big shareholders. We had a significant amount of shares. I mean my ideal, oops, my ideal board member is Juan Buffett. He knows the business. He knows business as a field. If he's gonna sell one of my buddies, he's probably gonna own like 10, 15% of my shares, maybe with Coca-Cola, it's less than that, but a significant amount. And he's there to maximize money, right? So you want businessmen, you want shareholders, you want people with money, you want bankers. And you want the board to be representative of the big shareholder blocks who own the company. On the big shareholder blocks. So you want the people who own 10, 15%, 20% of the shares, they're probably knowledgeable. I mean, how do you accumulate that kind of wealth? And they have a clear interest. If I'm a little shareholder, I'd like the guy who owns 15% of the company to be on the board, because I know that my interest and his interest are the same. Is there an idea of that? The interest of the small shareholder. What? There is a notion there, although I've never figured out why exactly. I mean, people talk about that a lot. And we'll see that. I mean, people try to get rid of Warren Buffett from the board. But to me, it makes no sense. Both are in it for the exact same reason. Oh, the question was, is there a notion out there that there's a conflict between the interest of small shareholders and large shareholders? It's just a matter of quantity. If the share price goes up, you're both affected percentage-wise the same. Just one has more money at stake than the other. Do some of these either small shareholders or big shareholders hold onto the shares for different lengths of time? Has maybe been their interest conflict? Potentially. Potentially. But yeah, I mean, you do not necessarily want, again, from an ideal perspective, you don't necessarily want on your board of directors. You're gonna sell it right away, yeah. People who are short-term, you want long-term shareholders because the tenure on the board is long-term. But I don't believe there's a conflict in a well-functioning efficient market. I don't believe in, we'll talk about when I think markets are not efficient, but in an efficient market between the long-term and the short-term. Because the short-term is driven by what? In an efficient market, what's the short-term driven by? What short-term price fluctuations driven by? The long-term prospects change. So short-term traders are doing what? I think short-term traders, but at this point, short-term traders are what make markets efficient. And to the extent that you reduce short-term trading, for example, by making capital gains, tax rates different between short-term trading and long-term trading, if you sell a stock a day after you buy it, you pay taxes as income. If you sell a stock a year after you pay taxes at the 15% level, which is much lower, that creates inefficiencies. Because it reduces the number of short-term traders. Now, what are short-term traders doing? They're repricing the stock all the time, based on what? Based on new information, about what? About the future prospects of the company. The more short-term traders you have, quote, speculators, right, the more efficient the price is. The more the price reflects the true long-term value of the company. So I don't want to suggest there's a conflict between short-term and long-term, but on your board, you want people who are going to hold shares, at least for the length of their tenure on the board. Stop by any of the 133 Los Angeles area O'Reilly Auto Parts stores, where you'll find everyday low prices on the parts you need to keep your vehicle at its best. Our guaranteed low prices ensure you're always getting our best deal. In fact, we'll match any auto parts store's price on any like item. O'Reilly Auto Parts, better parts, better prices every day. Oh, oh, oh, oh, O'Reilly. Okay, way behind. What's interesting is that the American regulatory system, at least from the 1930s on, discourages this type of board, and indeed with Sabine's Oxley, we've discouraged it even more. Give you some examples. Anks are not allowed to own significant equity. Your bank cannot own more than 5% of a non-bank endeavor. And they certainly are discouraged by all kinds of ways from taking board seats. So bankers who pre-1930s, if you look at J.P. Morgan, J.P. Morgan at some point had his people on a hundred boards of directors of some of the biggest, most important business enterprises in the U.S., really pre-1913 when with the Federal Reserve, 1914 when the Federal Reserve came into being basically, there were all these congressional hearings where J.P. Morgan was just devastated. Pre that, he was everywhere. J.P. Morgan's people sat on the boards and believed me, if J.P. Morgan's guy was on your board, interests were aligned. It was no conflict of interest. But J.P. Morgan, starting from 1914 with the establishment of the Fed, was discouraged from having that because they wanted to reduce the power of big banks. They wanted that, it's why we have the Fed. The Federal Reserve was created in order to, I mean for lots of reasons, one of the reasons was in order to clip J.P. Morgan's wings in order to reduce the power of private bankers. And as part of reducing the power of private bankers, they were discouraged from serving on boards and that was codified into law in the 1930s and persists to this day in slightly less rigorous form because after they've repealed Glass-Steagall in 1999, bankers can do more, at least through other entities. I mean, it's complicated. But the point is that bankers who should be large shareholders, banks should own large chunks of businesses. That's how it was pre-1930. That's how it is in Germany that doesn't have this particular regulation. That's how it is in Japan that doesn't have this regulation. Wood put a portion of their assets and they're the biggest financial institution banks are. Now, in, into private businesses, they don't. And then they don't sit on board. So we've taken out a significant shareholder and somebody who really knows business and we've taken them off the board. Yeah. I think I got it. I just wanted to get what your key points of our why. It sounds like because you can get a larger block of money together in one place and have someone with that expertise. Is that what you're saying? Yes, banks have large financial assets. They could take a big chunk of your company. They could take 10%, 20% of a big company and they could put a board member on who would help protect their interests if you will of shareholders, right? Who would be good at that. But banks can't take those kind of financial positions and then they can't sit on the boards. Well, it's very difficult for them to sit on the boards. Yes. The market place would work better. Yes. Bankers now will often have to act as some of the directors in the kind of scene. Market place would work better. Well, that's right, but those bankers don't have the kind of financial stake in the company to really get them motivated to spend the kind of resources to make that board a better board. And they would, I believe, in a truly free market. And note that we've done something to even our banking industry. Not only, I mean, we really in this country despise banks. I mean, banks from the beginning, from the earliest part of the 19th century have been on the hit list. There's a very short period of time where banks were truly unregulated. 1936, the Civil War, and yeah, to some extent, that freedom continued until 1913. But even then, state law, not at the federal level, the state level banks were heavily regulated. And one of the main forms of regulations was to keep banks small. Keep banks small. The United States, in 1980, had 21,000 banks. Canada has four. Now, it's Canada, but you know. Yeah. Now, granted, Canada has, what, a tenth of the population, maybe less than a tenth of the population, so multiply four by 10, 40. We had 20, above 20,000 banks. All the regulations of banks were geared towards keeping us small. You couldn't merge across state lines. You couldn't have more, some states, like Illinois, you couldn't have more than one branch in the whole state. And you couldn't go to another state. Continentally, Illinois, the largest bankruptcy in American history, which happened in 1983 or four, had one branch in Chicago. When bankrupt, 1984, one of the reasons was no diversification. So all the rules were set up. 1980, we started deregulating banks. In 1994, we allowed banks to cross state lines as much as they wanted. And today we have, from 20,000 to 21,000 banks, today we have 7,000 banks. 7,000 banks, that's still a huge number. But, yeah. What about the whole of the country? The government's doing more than that? Oh, absolutely, the government's got it rigged. So yes, there's a huge bias against stock speculation that part of it's through the margin requirements. So banks are heavily right. I mean, you could go layer after layer after layer in terms of these regulations and see their impact, right? But we've taken out a whole segment who would be great board of directors members who would be great shareholders and we kicked them out. So who else could be and is a big shareholder? Well, who else has large financial assets? Mutual funds. Mutual funds, right? The obvious candidate, mutual funds. But mutual funds are this bizarre animal. I mean, they really, they are complete creation. I mean, I said at the beginning that there are no government creations. But they are the complete distortion of government. I'll give you just a few, you know, you're not allowed, the guy who runs the money for a mutual fund cannot be compensated based on his performance. He can get a salary plus a bonus, but you can't link it, okay? So he is much more interested, for example, in managing a lot of money because he gets a fee off of that than managing it well for a return, right? That's by law. They can't do it. That's why we have, what's the other industry that's come about, you know, to correct the nonsense of the mutual fund industry? It's called the hedge fund industry. Hedge funds are mutual funds that are not regulated. That's all. I mean, they do, they do this stuff, but why don't mutual funds do that other stuff? Because they're not allowed to. They're not allowed to take short positions like a hedge fund can. They can't do all these sophisticated, you know, trades that mutual, if mutual funds were free, you wouldn't have a hedge fund business. It would just be one, call it what you want. Money management business. But it's the fact that hedge funds can't do a list this long of things that has brought about a hedge fund industry. And of course, now that they can do all this stuff, the regulator is saying, well, wait a minute, we've got all this industry that's not regulated. We need to start regulating them as well. So mutual funds, they have restrictions on how much of a single stock, how much of their portfolio can be invested in a single stock. So the government forces them to be diversified. But if they own more of one particular stock, they'd have more of an interest and they might be able to have more of an impact. And they are heavily discouraged by the 1940s Investment Company Act from sitting on boards of directors. And indeed, you won't find mutual fund managers sitting on boards of directors. Doesn't happen. Is there not a difference between the percentage of the total amount of stock that say a mutual funder and investor owns in a given company, you own 10% of a company stock or 20% of a company stock versus the percentage of the net worth of that investor that is represented by their ownership of a particular company? It can be both. And isn't that relevant to sort of the economic interest of the investment agent? The more of this net worth, obviously, that's presented in a particular company, the more interest he has in getting involved in making sure that that company has run well and that it works well. But yes. Okay, I'm just, I'm trying to understand. Which percentage is- The more diversified you are, the less interest you as a shareholder have in any particular company is doing well. And the less energy you're going to put in to making sure that it does. But what the system has created is less ownership concentration. We've created a financial system that discourages, heavily discourages, ownership concentration. So that Awan Buffett is an exception. The hedge fund industry is new. And indeed, it's changing the world we live in. It's changing a lot of the rules of the game. But it's new for decades. We didn't have hedge funds, okay? But mutual funds, if they had 25% of an asset of a mutual fund in one company, then the manager of that mutual fund would want to be in a board of directors and would want to monitor exactly what was going on. But if they only have 1% of their assets in a hundred different companies, why bother? Particularly when your income is not tied to the performance of your portfolio. This is, again, in hedge funds it is. So they behave very differently than mutual funds. So banks are discouraged from, not discouraged, not allowed to have large positions sit on boards. Mutual funds are not allowed to have large positions sit on boards. Insurance companies, there's a whole set of regulations and other big financial, are discouraged from having large blocks and sitting on boards. You won't find insurance company from the investment side sitting on boards of directors. And then pension plans. Now pension plans have very similar problems as mutual funds do. The way the manager's compensated, the level of concentration that they're allowed to put in and their ability to sit on boards of directors. All are restricted. And then you've got an added complication with pension funds and that is that what are the largest pension funds in America today? Unions, what else? Governments, governments. Government is the largest pension plans out there. I am horrified when I see a major annual shareholder meetings, I see the treasure of the state of Connecticut. Why is the treasure of the state of Connecticut go to annual meetings? Because she is responsible for the state employee pension plan. She runs it. And therefore, as a representative of that pension plan, she goes to annual meetings. What is her agenda? Maximizing the wellbeing of the pensioners in terms of wealth? No, she's got a political agenda. She's got a political agenda. Culpers, the largest institutional investor in the United States is what? Is the California public, I mean, the two of them, Culpers and Colsters. One is for the teachers and one is the state's employees. And both the teachers and the state employees, who nominates the state employees, who nominates the people sitting on the board that run this largest financial, the largest institutional investor, largest investor in the United States? Well, the government does. Politicians. What is their motivation when they go and they try to get involved in companies and push them to do certain things? Is it wealth maximization? No. I don't care about shareholders. Are they compensated on? No. No, they're appointed by politicians. They're beholden to politicians. They can make their job, lose their job. Politicians. So what we've created in this country is the shareholders. A big class of shareholders. A huge class of shareholders. The pension plans. Many of the pensioners. Some of them, some of the private pension fans are interested in wealth. But many of them, the biggest ones, the most influential ones, are not interested in wealth. They're interested in all these other things. So they, as shareholders, are now going on to annual meetings and proposing to change the corporate charter in ways that reduces wealth. And everybody's saying, the shareholders, they're allowed to do that. That's okay. That's what they want. Who are we to interfere? Well, what about the shareholders that don't want? That's why I said before, I don't believe you should be allowed to force companies to do things, even shareholders should not be allowed to force things to do things that are not wealth maximizing. Or not framed within a context of wealth. You can make mistakes, but are not framed in the context of wealth maximization. Because particularly today, it's completely perverse. Because the largest, most influential institutional investor is our politicians. One of the things that I fear most about plans to so-called privatize social security is that whoever runs the social security funds and invests them in the stock market is not gonna be motivated by wealth concerns, but is gonna be motivated by what? By politics. And as a consequence, you will have the largest, even larger, the culprits. You'll have all the social security money flowing into the stock market, which would be good if it was managed by private individuals. But there'd be proposals where it's a state fund that doesn't. And that would be devastating for our economy. It would be the end of capitalism, any form of capitalism, even a little bit of capitalism we have today. Because everything then would be politics. And you have to really watch anyone of these proposals, even if they wanna privatize a little bit and put it into the hands of private investors, but then there'd be a list of who was approved to manage that money that the government put together. And those investment managers will be beholden to whom? To you as the owner of that account? No, but to the government to keep them on the list. And the government might start requiring them to vote in particular ways for shareholders' proposals. That's why I'm a big fan of either you do away with social security or you leave it as it is. But all these mishmashes that can create more problems and more perversions in the market than exist today. I mean, phase out social security over time. Any questions? Yep. I have a question. The comment is that you said that Alton is really behind this kind of state-of-the-art, this whole thing, right? It's not as much pure Alton's method as the California one. So I don't think you're out in the midst of how it was. But you say equity and fairness, and what about everybody that he will share with us? Some of that, that would be those on the other side. So I'll also be an underliner on this. And the question I have is about the issue that we already discussed about, whether you should appease or whether you should stand up and support, is there anything that's not successful? And I don't think that if you appease, you're not just, you know, they tend to talk as well. I think the only thing, you can't just say, well, we'll be doing what we're always saying, if you don't want to cut your mind. So what's your comment? Well, let me just comment on your comment. I think you're right. Galeaterinism is a way altruism is often presented, but let's remember that Galeaterinism is altruism. It's just a particular form of altruism, which is particularly, which is more palatable to most people than a Kantian kind of, you know, don't do anything, don't even consider yourself. You know, it rolls, and they use rolls a lot. You know, they somehow managed to make rolls palatable. I don't know why, but they managed to pull that off. But I think, I still return to my point that I think more than what underlies this as anything positive that they have to say that advocacy for Galeaterinism, advocacy for altruism, is the negative. Aggrocy against self-interest. That's what is really common to all of them. And that's what really works. Because even the Galeaterinism doesn't really work that well with Americans. But the idea that self-interest is bad, that works universally. And that's what the altruists cash in on. It's that notion of self-interest. Remind me what the second thing was. Oh, standing on principle or not. I mean, this is just proof that the complexity of this question, the fact that nobody really has an answer to that question is proof that capitalism will not be saved by businessmen, not in their capacity as businessmen. The only way businessmen can save capitalism is by going on strike. The other way they can save capitalism is by supporting objectivism. The solution to capitalism is philosophical and ultimately political. Not businessmen standing up and maybe going bankrupt as a consequence, which maybe is a way of them going on strike, right? Ultimately, the solution is philosophical. So, and it's not the businessmen taking a philosophical stand, one business taking a philosophical stand, but it's changing the culture. It's a cultural revolution. And to the extent that businessmen can help that cultural evolution by taking principle stands, that's great. But as long as they don't do it in a sacrificial way. But there's no way for them to win. I guess that's what would. If they stand on principle in today's world, they'll get clobbered in many cases. Not again, if they take them in a domain, maybe they can do it, but in other things. So, you know, if a businessman tomorrow said, came out and said, I don't care about the environment, we're gonna do whatever we want. We're gonna trip with the law. They're gonna get nailed, right? So, there's certain areas where they can stand on principle and benefit even and not suffer, but there's certain areas where they're gonna get clobbered. So they have to do it in a non-sacrificial way. But to the extent that they can stand on principle and not sacrifice, then that helps the movement to change the culture. But it's gonna take to change the culture to save capitalism. Yeah. That's right, that's right. You're not, there's no duty to stand on principle when standing on principle means you're going to, you're gonna be killed. Which is, you know. Yeah, I mean, that's not the alternative. And that's the trick of the, where they really kill themselves, where they're really jumping in front of the train, is when they violate principle, you know, on principle, right, when they do it all the time without putting up any kind of a fight, you know, and they do it upfront and vocally and proudly, right, supposedly. If they just went me quiet, it would be good. You know, it would be huge, you know, it would slow down the deterioration. Suggest them, or under protest, if they did it, but under some kind of protest, right. Instead of the guy from Park the Hamper saying, yeah, I'm a politician. That's just the way it is. And if he could say a lot of other things that wouldn't be so appeasing, while not upsetting anybody as well. Yeah. I was wondering along those lines whether it would be helpful for a business to say, in effect, these are the principles that we would like to follow to maximize shareholder wealth, but we are not allowed to do that because we're faced with the following legal regimentation. I think a lot of businesses could get away with that and not suffer, you know. I think there's a lot that we could do, but they have to, you know, they have to be careful. They have to be careful, because what is their fiduciary duty? It is to maximize the wealth. Yeah, I mean, I'm contemplating that, particularly as a response to environmental stuff. You know, the company said, you know, we would love to be able to maximize shareholder wealth, but we've got these laws, and by the way, shareholders, these laws are costing you money. Absolutely. Thanks. We'll see you all tomorrow. This course continues with lecture three. Something incredible has arrived at Disney California Adventure Park. Darling, I want action. We're going big. Elegance. And we're going fast. And speed. The Incredicoster is here and now open at Pixar Pier at Disney California Adventure Park. Bring your super family and your friends and come celebrate Friendship and Beyond at Pixar Fest before it ends September 3rd, only at Disneyland Resort. Attractions and entertainment subjects have changed without notice. Something incredible has arrived at Disney California Adventure Park. Darling, I want action. We're going big. Elegance. And we're going fast. Speed. The Incredicoster is here and now open at Pixar Pier at Disney California Adventure Park. Bring your super family and your friends and come celebrate Friendship and Beyond at Pixar Fest before it ends September 3rd, only at Disneyland Resort. Attractions and entertainment subjects have changed without notice. Something incredible has arrived at Disney California Adventure Park. Darling, I want action. And we're going big.