THIS Will Destroy Shareholder Value

By: Chris Tell

Drinks at the Corney and Barrow matey? I winced,  feeling my wallet lighter already. You coming? Urgh, 5 quid for a pint, can’t we go someplace else? I don’t make nearly as much as you overpaid traders. Don’t worry about it, it’s sorted, the boss is coming so it’s on the expense account. Put your drinking shoes on pal, this is gonna be a big night!

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In my early 20’s I found myself swimming in the world of London’s investment banking scene. The above scenario played out regularly. Thursdays are “drinks night” in the city of London, and if you were to graph corporate expense bills over the course of a month there would be 4 distinct “spikes”.

It was the late 90’s, markets were booming and the only thing that seemed to be flowing faster than the pints on a typical Thursday night in the city of London’s watering holes, was of course the money.

Living it up…great food, expensive cocktails – in fact the more expensive the better – that was the prevailing attitude. Never on your own dime of course.

This wasn’t unique to Lehman, who I was with at the time, or to any other bank for that matter. I contracted to a handful of the big names, and they were all abusers.

It was, and still is deeply ingrained in much of the investment banking corporate culture. It’s also been a cancer in many of the businesses I’ve researched over the years.

I now have zero tolerance for it as an investor and business owner, despite the fact that I was more impressionable when younger.

Back then, being young and naive, working for a fancy-pants IB, I was awestruck by my bosses spending hundreds of pounds in a drinking session. As I look back I’m embarrassed for thinking that these wealthy parasites where gods of some kind. The more they spent…the bigger an asshole they were…the more they were idolized and revered!

As far as I could tell most of my fellow inmates had applied to an ad that read something like: Arrogant, obnoxious, self-aggrandizing types being accepted now. 

In hindsight I think the guilty feeling that I felt when participating in this was grounded in the knowledge that I was getting something for nothing and someone, somewhere was being taken advantage of.

Yet, guilt notwithstanding, I confess that at the time, I along with my colleagues abused those expense accounts to the best of our abilities. Yep, I was a pig along with everyone else. After all, I never answered to Lehman shareholders, so what did I care?

Dick Fuld however did answer to shareholders, yet he was paying himself rather handsomely…nearly half a BILLION dollars between 1993 and 2007!

That made our expense account abuses look positively shareholder-friendly in comparison. This was during the period just preceding Lehman taking a bullet to the head. Hell, if the CEO is raping and pillaging then you can be sure the corporate culture has been set. Monkey see, monkey do.

Here is what happens when corporate culture is invaded by free lunches.

Humans have a desire for fairness but also love a free lunch. These two aspects work against each other.

Soon one manager sees another manager ordering lobster at lunch and thinks to himself, “Screw it, if he’s getting it so should I.” Rapidly a culture of entitlement develops where mysteriously, corporate travel, apartments, dinners, drinks and other things that have little to no ROI start burning up the expense accounts. These folks rarely stop to consider the impact of their actions, while somehow believing that they have “earned it” and indeed “deserve it.”

I was never able to put my finger on it at the time, but having subsequently spent the majority of my adult life researching and investing in early-stage businesses, I now have a keen eye for spotting this, and will never invest in businesses which allow this type of culture to gain footing.

Once let in the door it grows like a cancer and completely destroys shareholder value.

Incidentally, it’s not distinctly different to how career politicians view themselves. They actually believe that what the do, day in and day out is worth something more than it is. That it’s somehow more than just community service, and they should be compensated in the fashion that they (currently – hopefully temporarily) are.

Let’s look at an example of what I’m talking about in action…

Recently I was doing DD on  a start-up company. The CEO was paying himself a six figure salary yet the business is pre-revenue. I looked at the financials and found not only was this truly astounding salary being paid out of seed investor capital, but corporate travel was all business class, including a flight from San Francisco to Vancouver!

Nobody, and I mean nobody needs to fly business class on a 2 hour flight. I expect business travel to be economy until the company is profitable. If I see frivolous 5 star hotel stays, extravagant dinners, a leased Mercedes and the like in the expense accounts, I’m gone.

I would rather take my investment capital, pack up the wife and kids and go have a nice vacation ourselves! No need to pay for someone else’s lavish lifestyle.

To prevent getting involved in an investment where the corporate culture is destined to destroy (your) shareholder value, I suggest taking a look at the following…at a minimum:

  1. Insist on reviewing the expense accounts.
  2. Insist that pre-revenue, salaries are restrained.
  3. Try to, as best you can, understand the culture of the organization.

Look, at the end of the day nobody will argue that the staff at Lehman brought down the bank solely by abusing their expense accounts, but certainly Lehman had a corporate culture that didn’t give a hoot about shareholders. That important, yet easily recognizable defect certainly contributed to their demise.

– Chris

“I am soft, I’m lovable but what I really want to do is reach in, rip out their heart and eat it before they die.”- Richard (Dick) Fuld – CEO Lehman Brothers.