Mason Morfit and Rob Hale – Quiet Activism at ValueAct (EP.462)

Mason Morfit and Rob Hale are the co-CEOs of ValueAct Capital, which manages $11 billion in public equities focused on the US and Japan. Since its founding in 2000, ValueAct has charted a distinctive path in activist investing, eschewing confrontation and publicity in favor of quiet, meaningful partnerships with management teams. But they agreed to join me to reflect as they celebrate the firm's 25th anniversary this year. Mason helped launch the firm and has driven many of its successful investments, including the turnaround of Microsoft in 2013. Rob joined fifteen years ago and leads the firm's investing in Japan. He joined the Board of Olympus in 2019 and helped usher in a new era of engagement between global investors and Japanese companies. Our conversation covers their paths to ValueAct, the firm's history and evolution, and the challenges that great companies face. We cover their philosophy of working with management teams, investment process, governance, long-term value creation, lessons from mistakes, application of their approach to Japan, and the adoption of their principles internally at ValueAct. From our sponsor, Morningstar Embrace the global language of investment data https://www.morningstar.com/business/campaigns/where-data-speaks?dclid=CMTbg_DasI8DFaE6aAgdWtUfiw&gad_source=7&utm_campaign=crp_gl_n_n_en_2509_tf_n_wds_capitalallocatorsscript2&utm_content=audio_240530177&utm_medium=audio&utm_source=capitalallocators&utm_term=420544243 Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We don't deserve the credit because there's not just the CEO and the board. Usually when we're investing in a company, there are a lot of people inside the company who see the exact same opportunity that we see. It's almost never the case that we have some idea that nobody in the company has ever thought of. There's usually a troop of people who are celebrating when we get the CEO to pay special attention to the idea that they already had. Those people aren't going to get the credit either. The reality is that maybe nobody deserves the credit because it's a collective exercise. We tell our story to our own investors. We don't do much in public. After 25 years, it's an opportunity to tell our story a little bit.

• 0:48Ted Seides?

  I'm Ted Seides and this is Capital Allocators. My guests on today's show are Mason Morfit and Rob Hale, the co-CEOs of ValueAct Capital, which manages $11 billion in public equities focused on the US and Japan. Since its founding in 2000, ValueAct has charted a distinctive path in activist investing. It's chewing confrontation and publicity in favor of quiet, meaningful partnerships with management teams. But they agreed to join me to reflect as they celebrate the firm's 25th anniversary this year. Mason helped launch the firm and has driven many of its successful investments, including

• 1:32Ted Seides?

  the turnaround of Microsoft in 2013. Rob joined 15 years ago and leads the firm's investing in Japan. He joined the Board of Olympus in 2019 and helped usher in a new era of engagement between global investors and Japanese companies. Our conversation covers their paths to ValueAct, the firm's history and evolution, and the challenges that great companies face. We cover their philosophy of working with management teams, investment process, governance, long-term value creation, lessons from mistakes, application of their approach to Japan, and the adoption of their principles internally at ValueAct.

• 2:12Speaker 02

  Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed-door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share in best practices with each other. You can learn more at capitalallocators.com/university.

• 2:54Speaker 02

  Thanks so much for spreading the word about Capital Allocators University for investor relations and business development professionals.

• 3:01Ted Seides?

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• 3:46Ted Seides?

  so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alpha-sense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done.

• 4:30Ted Seides?

  You're at your desk, looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to

• 5:14Ted Seides?

  materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable

• 5:53Ted Seides?

  relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators. Please enjoy my conversation with Mason Morfit and Rob Hale. Rob, Mason, thanks so much for joining me.

• 6:30Speaker 03

  Thanks for having us, Ted.

• 6:32Ted Seides?

  Mason, take me all the way back. I'd love to hear some about your upbringing and how that might have influenced what's happened since.

• 6:39Speaker 04

  I grew up in Asia. My dad worked for the State Department for USAID. I spent three years in New Delhi, India, then eight years in Jakarta, Indonesia. Went to British schools. My friends were Australians, Brits, expats from India. I played on a little league baseball team with all Japanese kids and a Japanese coach who didn't speak English. And I think this background gave me a sociological awareness of backgrounds and culture, a feeling of outsider looking in, observing. I came back to the US for high school and then went to college. And I studied economics, but I was really interested in the mathematical modeling of human behavior, some of the theory behind the things I'd been experiencing. I wrote a paper on Mahatma Gandhi's economic theory, which had wildly different assumptions

• 7:22Speaker 04

  about human behavior than Western economics. Unbeknownst to me, Princeton had hired Danny Kahneman out of UC Berkeley and a few hundred miles north, Richard Thaler was at Harvard doing behavioral economics, but that wasn't really a thing. The canon was that everybody was rational, everybody was greedy, everybody was maximization oriented, nobody was irrational and had psychological behaviors that didn't fit into this homo economic mindset. I thought that was incorrect. Some of that orientation laid the groundwork for the investing that we did later.

• 7:55Speaker 03

  I don't know that I'll ever get a chance to ask somebody about the economic philosophy of Mahatma Gandhi. Figured I might as well ask, what did you learn from that thesis?

• 8:06Speaker 04

  If you think about the supply demand curves you learned in college, which had the presumption that more is always better. Gandhi had a theory that actually people cared about other people and had other motivations than just more, more, more. And maybe those curves bent in weird ways that were in a third dimension on these graphs. The aha for me was that as you get larger and more abundance, behaviors change. A lot of the companies that we invest in are great businesses with cash flow and they experience these symptoms of abundance that can sometimes be very productive and sometimes very destructive.

• 8:39Speaker 03

  Where did you take that coming out of college, those early lessons in behavior and economics?

• 8:44Speaker 04

  My first job on the street was at CSFP doing equity research. There was a guy there named Michael Mobison, who wrote really interesting papers. They rang my bell in the same way. He was looking at how ant farms behave and how emergent behaviors work. But he was a real outlier on the street. I was attracted to what he was doing, but very repelled by everything else I saw around me. I spanned this era from long-term capital management blow up to the dot com bubble burst, which was an interesting time to be on the street, one of the biggest equitization booms in the history of the markets. I worked in the healthcare group, which was ironically the only sector that did not work during that period of time because President Clinton balanced the budget and all the healthcare services companies crashed and was in a cubicle that was shrinking day by day. They

• 9:27Speaker 04

  kept cramming more and more people in and people next to me would be in the tech group, promoted to these massive offices. And I was in this office space dynamic where at one point I couldn't even turn my chair around. So as the walls were literally closing in on me, I looked around and I saw a system that was built on hero worship. Number one, we used to bring folks like Jeff Skilling of Enron in and have these big town hall meetings and everybody would ooh and ah about how brilliant he was. And next in would be Hank Greenberg from AIG and then Sandy Weil from Citigroup. This system of putting people up on a pedestal, it was a real quarter by quarter mentality. And in order to play that game, you used people in a transactional way to trick management into giving you breadcrumbs

• 10:09Speaker 04

  that would let you game the quarter and get an edge and get the model done right. So there I was in my little backwater of the healthcare group. A lot of these companies should have never been public to begin with because they were former nonprofit organizations that had been turned into public companies and then rolled up. Some of them collapsed quite spectacularly. On the way down, they started engaging in some behavior that was aggressive on the accounting front and bad M and A. And that started to light a little bit of a match in my head on the idea that public companies can do weird things to management teams. In the bubble and the euphoria on the way up and the desperation on the way down. I literally published a report on the accounting shenanigans that were going on in the industry, which did not make us very popular with the management teams in the

• 10:52Speaker 04

  group. And right before all the walls completely smushed me, I met this guy named Jeff Ubben, who was founding Value Act and had no AUM whatsoever to speak of, but an idea that you could invest on the principle of being a long-term thinking partner to management with a voice, not hero worshiping people, but viewing them as peer-to-piers and partners that you're building something with. All of that made perfect sense with me. And so I ejected from the big bank and I went to the startup that had nothing. And that's how it all began.

• 11:22Speaker 03

  Rob, when did you come into the picture?

• 11:24Speaker 00

  I joined Value Act in 2011, so 11 years in. It's been a very interesting, now 14 years partnering with Mason and helping to build the firm.

• 11:34Speaker 03

  And what was your path to joining?

• 11:36Speaker 00

  Unlike Mason, I didn't grow up in a very exotic location. I grew up in a suburb outside of Boston. I had a great childhood, great educational opportunities. I'm very grateful for that. But my path led me to Dartmouth College. As an undergrad, I studied the classics, classical languages specifically. But I knew that there wasn't much that you can do in the world with that field. So during my time in college, during every break I had, I made sure to work in different fields of business. When I graduated, I decided to take an opportunity to work in the consulting industry at the Parthenon Group in Boston. It was a group

• 12:17Speaker 00

  that spun out of Bain and they were very entrepreneurial. They had a great culture of risk sharing with their clients. They had formed one investment firm, Parthenon Capital. They were trying to expand globally. And the pivotal year before joining Value Act for me was 2008. Parthenon wanted to expand into Asia and they were looking for a junior member of the team to go and help create the culture for that office. I jumped at it. I'd never been to Asia before, but it seemed like a pretty interesting adventure. So I was there for six months. The project I worked on took me all over. Asia, not just India, but the Middle East, China, Southeast Asia, Hong Kong.

• 13:01Speaker 00

  Never brought me to Japan, but I did learn how to navigate different business cultures at a pretty early point in my career. The second reason 2008 was pivotal for me was the financial crisis happened. It kind of put capital markets front and center for me and be kind of fascinated with the markets and also fascinated with the stories of some of the investors who had predicted the financial crisis and they'd done it through security analysis. It just clicked for me that this is something that I'd really like to do. I could take the business analysis, learn through consulting and apply it to the markets. When I got back from India, Parthenon had started another investment vehicle that was focused on public equities.

• 13:46Speaker 00

  I made a good connection with the portfolio manager of that fund, who asked me to become a full-time analyst. We did interesting work, but the thing that was missing was that we would do great work generating insights. We could have a dialogue with the IR team of a company, but we were not in a position to influence management. And there were times when I felt we would see opportunities for a company that weren't being captured and we weren't in a position to help them. By 2010, I was focused on this idea of working in an investment firm where you could partner with management, influence management. And I happened to be at one of these investor conferences in New York. And I happened to be in a meeting with Jeff Urban

• 14:31Speaker 00

  and one of our partners at Value Act, Jake Welch, who were meeting with the company CEO in the defense industry. And it was like a revelation for me. The conversation that they were having, it was not about the next quarter. It wasn't about analyzing the history. It was pulling the CEO out of the quarterly earnings game and asking the key questions of what is going to double or triple the value of the company over three to five years? As soon as I got out of that meeting, I thought, I have to see if I can join these guys. Just serendipity, Value Act happened to be looking for someone with a consulting background.

• 15:11Speaker 00

  Mason was leading that search for someone and I got into the process and managed to get the job.

• 15:18Speaker 03

  In that period of time, before Rob joined and Mason, the whole way through. Other than this very different way that you both described of conversing with management teams, what was the overlying strategy of Value Act from the beginning?

• 15:33Speaker 04

  There was a view that there was a great white space. Venture investors have board seats and engagement and great voices into their companies and their leaders. Private equity firms control their companies and have total control over the governance. And in the public markets, there had been a legal structure of votes and accountability, but one that wasn't very well developed. In the 1990s, there was very little proxy fight shareholder activism. We thought this is a white space. People who own the public securities should be adopting not just the mentality of an owner, but actually the role of an owner and having that kind of engagement. That was a pipe dream at the moment that the firm was formed because that is not how the world worked. CEOs were not to be questioned in the 1990s. They were larger than life.

• 16:16Speaker 04

  If you remember what Business Week looked like in those days, it was almost like a tabloid. It just wasn't the way that the relationships were oriented in that time. A couple of things really set the firm up for success. One was that there was a big mess left over from the 90s. All this massive equitization, we went up to 8,000 public companies, many of whom did not have strategic focus or operational excellence. Industries were fragmented, balance sheets were very cash heavy and not efficient. And then a funny thing happened. In 2002, there was a wave of corporate scandals. Enron, WorldCom, Adelphia, which was followed up by a wave of regulations. Sarbanes-Oxley being the most notable at that point in time. That wave kept coming after the great financial crisis.

• 16:59Speaker 04

  The convergence of an opportunity set for problems we thought we could work really well on with a regulatory regime that forced an attitude change of corporate boards and how they operated created this opening for this strategy to really work. We weren't alone, but we did it differently. We did it with little publicity, very much sharing credit with an attitude of teamwork and partnership, not confrontation, litigation, intimidation, press threats.

• 17:25Speaker 04

  Fear, et cetera. One of the other slipping on a banana peel and ending up landing in a pile of money, as one of our LPs used to describe it, was we invested in Martha Stewart's company during the crises. We got her to sell the only share she'd ever sold into our company, $60 million to us, because we told her how scary it was to see all these scandals. And shortly thereafter, she went out and insider traded a security and ended up going to prison. And Jeff, our founder, became chairman of the board of that company. Now, all of a sudden, Little Value Act, that was not a well-known entity at all, a chairmanship at one of the most important governance crises in the markets. And we got to go to work on these issues of strategic focus, operational excellence.

• 18:07Speaker 04

  It's paradigmatic of that time that Martha had a big e-commerce site that they were building out. I characterize it by saying Martha was trying to go head-to-head with Amazon, but that's directionally what was going on, burning $40 million of EBITDA when clearly a much better strategy would have been to fall back to a licensing strategy like to Kmart and other places that were in the works. And getting focused, getting operationally excellent, steering through crises, we proved our mettle through that crisis and embarked upon building competitive advantage through relationships and life experiences, because these things compounded snowball. I often say, if you're going to go through life litigating and intimidating and threatening people, you're going to burn a lot of bridges.

• 18:50Speaker 04

  But if you go through life building things with others, you're going to build up an army of people that will help you in the future. There's only three ways to win in equity investing. One is you have better information or faster information, computer programs and fiber optic cables that you tunnel through railway lines and stuff, and we don't do that. The second way is you understand the world better. No one is smart enough to figure it out on their own. You need a team internally, and then if you can augment it externally, and by now, 25 years in, Over 100 investments, over 50 board seats. We have this army of people that are really good friends of the firm, advisors, LPs with us. And then the third way to create returns is to influence the future. And that is also a significant part of what we do.

• 19:33Speaker 04

  Change how the course of history is going to flow. That was what we were doing in the early 2000s. And these thunderclaps of the scandals and then the bursting of the dot com bubble set us up to go on a run. And Rob joined midway through that first chapter of the firm.

• 19:50Speaker 03

  Over the last 25 years, there have been several waves of activism, being very popular, then falling out of favor, being popular again. Would love to hear your views of activism broadly, having noted that you do go about it differently and more quietly than most others.

• 20:09Speaker 00

  There's two ways to look at it. One is from an investing standpoint, and the other is from an engagement standpoint. If we think about how we think about value creation and the public markets, there's two sources of alpha. There's making a great investment in a company that's going to outperform over time because they have mega trends behind them, because they have very strong unit economics, because they've got competitive protection, that business can compound in value over time. The second is to engage with the company and to improve its chances of success, to improve its capital allocation, to improve its strategic focus, its operational execution. There are a lot of investors who are great in the first category.

• 20:50Speaker 00

  And there are also a lot of practitioners of this activist investing who focus on the second, operational improvement. And I think what's allowed Value Act to stand out over 25 years is that we've tried to be excellent in both categories. We put the quality of the business first in our filter, not the valuation, not the degree of underperformance, but the potential of the business to grow, to add value to its ecosystem, to add shareholder value over time. Part of the reason that activist investing has had its cycles, and not every activist investor has survived those cycles, is because a lot of practitioners of the industry have

• 21:32Speaker 00

  been excellent campaigners, great users of the media, but not necessarily great investors. Jeff and Mason, from the very beginning, put investing excellence.

• 21:44Speaker 00

  First and foremost in our firm ethos.

• 21:46Speaker 03

  Mason, I'd love to hear what's been similar and what's changed in your approach over this quarter century.

• 21:55Speaker 04

  The through line that Rob just touched on has been so consistent, which is looking for high quality companies. We define those as ones that have high returns on capital, great incremental margins because they've got big moats and they've got either intellectual property or network effects. A lot of value investors could recite those mantras. What we've become experts in is understanding how those go bad. Because if you have a really amazing cash flow engine, it can tolerate poor decision-making, poor talent. You tend to see companies say yes to a lot of things because why not? To diversifying a lot of peripheral activities that don't benefit the core, to not run their businesses very tightly from a cost structure standpoint, to build up excess cash on the balance sheet.

• 22:40Speaker 04

  And to eventually sort of lose their corporate identity because they've spread themselves too thin. The vernacular we have inside of Value Act is these are the diseases of abundance. Like eating too much food and drinking too much wine can lead to a disease of abundance. So can having too much cash flow. And it can be further supercharged when the capital markets get all exuberant about this and jack you up with very cheap equity and debt. I'm reminded of this Ronald Reagan quote about looking at the big pile of horse manure and saying somewhere there's a pony in there. Usually by the time we're engaging with a company, it's lost its credibility or way because of this abundance that's led them into so many different directions.

• 23:21Speaker 04

  And sort of getting them back focused on what matters, getting focused and fit, and then driving for excellence in their core business is a pattern that's recurred.

• 23:30Speaker 00

  One way to think about it is if you're a steel company or an airliner and you're in some commodity industry and you misallocate capital for 10 years, you go bankrupt. Someone takes you over. If you're Microsoft, if you're Adobe, if you have a very strong franchise and you don't necessarily operate to potential for 10 years, you have a flat share price. You have some upset investors. You maybe have some upwelling for change, but there's a lot of tolerance in a great business for lack of focus. We've always tried to have the conversations with management that we think the board should be having. When we go into a CEO meeting, I think to myself, if I were a board member of this company, and sometimes we are,

• 24:13Speaker 00

  what would I be asking to the CEO to talk about what's going to double or triple the value of the company in the next period of time?

• 24:22Speaker 03

  This idea of feeling like you need to help make a change, paired with doing it quietly, how does that play out in the companies you're involved with?

• 24:34Speaker 00

  We believe everybody wants to get fit. And that's a different mindset that we have compared to others who are more cynical, who see and focus on the conflicts of interest and question motives. We honestly think that every management team wants to do well. Every board member wants to do well. As a result of that orientation, it leads us to have conversations about issues at a company in a generous way. Yes, we want the company that we're investing in to achieve its potential, but getting there is often quite hard. Tough decisions need to be made about strategy. CEOs have been saying yes to a lot of things, sometimes need to start saying no to a lot of things.

• 25:19Speaker 00

  Sometimes there are carve outs or restructurings. These things are quite difficult. So we try to approach those conversations in an empathetic way. I say empathetic because we've worked on these issues over 25 years at different companies and situations. So we can say, here's how we've worked with a company on the same problem in another situation. It generally also inspires trust on the other side.

• 25:45Speaker 04

  We invested in Microsoft in 2013. The headlines at that time were lost decade. The ticker should stand for missed search phone and tablet. It was not a well-liked company at all. It had been traumatized by antitrust investigations a decade or so prior. And then it was facing an existential threat from two things. The smartphone that had been pushed forward by Apple and cloud computing, which AWS had pioneered. So the PC legacy of the company was not what was going to take it forward. And the stock was trading at about eight times earnings. I went to a normal investor relations roadshow where the office team present. And they were talking about this thing called Office 365, which was to take Office to the cloud. I came back and I did some math on a spreadsheet and I was like, oh my gosh.

• 26:30Speaker 04

  One thing that's happening is that Office is decoupling from the Windows cycle. They used to be sold. You'd buy a PC with the Windows and Office on it. They'd be completely coincident. You could see it starting to separate. And the second thing was Office alone, if this thing works, is worth more than the entire company. So what about all the other pieces of the empire? And where's all the money going? We networked our way to the board. We networked our way to the company. We made a very large position on this, not with a prescription from the outside about why, what they were doing was so stupid and why we were so smart. We didn't actually know the answers. We didn't yet know what to do with Bing or what to do with Xbox. The vote of confidence that we made, they liked, and that opened them up some more. We applied a tool that we had refined by that point in time called the shadow P and L,

• 27:15Speaker 04

  which was financials are reported out as a function of the bureaucracy of the company, not necessarily as a function of the real economics of the business. So the segment disclosures you're getting are not necessarily the true economic picture. But if you're a good securities analyst, you can deduce what the true economic picture is. You can interview people and figure out where allocations are going in terms of costs. You can understand in a way that is complementary to existing reporting and complementary to management, because they are looking at what the bureaucracy is reporting up to them. They don't necessarily have this orthogonal. Look at stuff and it is estimations and guestimations and swag math on a spreadsheet, but it time and again proves to be really insightful. I'm going to try to connect one idea I talked about earlier, which is that public company

• 28:00Speaker 04

  get pushed around by the public markets. Their strategy tends to drift in reaction to what's hot. Martha was going after e-commerce because it was hot. Microsoft went after phones because Apple was so hot. And so was Google, they went after Bing because that was hot. And so they poured tons of money into these initiatives that were not accurately tracked by the existing financial reporting systems of Microsoft, but you could triangulate them from the outside. So when Satya took over as CEO and I joined that board, we started presenting these outside in orthogonal looks at the business and we could deduce that there was massive amounts of costs and losses being poured into these hardware initiatives to the tune of four, or five, six billion dollars a year that might be better spent driving Office 365 and

• 28:41Speaker 04

  Azure instead of trying to chase the iPhone or chase the Google search dream. Looking over this analysis and talking it through privately and reaching decisions about where we're going to allocate capital and energy and where the identity of the company is going to shift, happened in that way, step by step by step, and all the meetings. Eventually, we wrapped around another skill or tool in our toolbox, which was executive compensation. Once you've heard what's going on through this deductive reasoning and shadow P and L organization, and once you shift the strategy, and once you have the right people running the company, how do you then tie compensation to it so that it reinforces everything you're saying and shifts these organizations that in that case at 100,000 people, you had to

• 29:25Speaker 04

  get on board with something brand new. I looked back at the Microsoft proxy this year and I was really pleased to see that the basic architecture of what we designed over a decade ago is still in place. It's cool to have been part of how this enormous, important company reoriented itself. That's how this works. Rob did something similar to MSCI, or you guys to death with example after example of applying these methods to kind of make it a us project, us and the management team and the board working together to get to truth and get to excellence, not bullying or shaming or lecturing from the outside.

• 30:01Speaker 03

  What are some of the other tools that you've adapted over the years that you bring to the companies you invest in?

• 30:08Speaker 04

  I think about them almost like pieces of a jigsaw puzzle that all click together and reinforce each other. Number one is strategy. Are we doing the right stuff? Are we playing in the right markets? Are we focused on the right things? How do we tracking that progress? We call that either dashboarding or building a better board book or KPIs so that we really see true economics. Then it's executive compensation, which is how do you tie outcomes to that? There's CEO succession and talent management, which is do you have the right people to execute that strategy? Do the people match the strategy? Are they tracked for the right dashboards? Are they paid in the right way? And then you've got corporate identity slash investor relations, which is are we telling the world who we are? In a way that will attract the right investor base, an investor base that will be patient for what we are trying to get to.

• 30:50Speaker 04

  Cause it might take us, if you're in the case of Adobe, three years to convert from a license to a subscription model. And we want investors to get it and are along for the ride and are not trying to guess the quarter. Those are the basic building blocks of how we can help reorient a company, recover from some of these diseases of abundance and inoculate itself against some of these temptations and weird things that public markets can do by creating alignment with the public markets. For a mission that's usually three to five years.

• 31:21Speaker 03

  Among those criteria, when you mentioned getting the right CEO in place with succession, or just having the right team in place. Everyone's trying to figure out getting the right people. What does that mean? And have you figured out if someone in the seat is the right person to bring it forward?

• 31:37Speaker 00

  Our orientation is to try to work with great management teams from the outset. So we're going in as part of our evaluation of a situation. We're hoping to prove out the existing team has a high level of capabilities. We get involved with companies for long periods of time. We say three to five years is our typical investment cycle. In some cases, it's five, 10, even longer. CEO succession, sometimes during that investment cycle is relevant. There have been 27 cases where we've been involved in CEO succession. The approach we take, we try to be quite deliberate about it. We start with the strategy, as Mason said. And we create a scorecard of success.

• 32:22Speaker 00

  What does the company need to achieve to reach its potential over the next three to five years? Be very specific about what the one to five key things are that the CEO needs to lead the company to achieve. When looking at internal candidates, external candidates, we're assessing have they accomplished similar things in their roles in the past? It's about track record. Obviously, ethics are extremely important. Creating a performance culture is extremely important. In each company's unique situation, there's usually a few key value drivers and we're super focused on finding the CEO who we think is best able to achieve those objectives.

• 33:05Speaker 04

  Think about a public company. Unlike a private company where investors have a very specific investment thesis, we're doing this and know what they're looking for. A public company is sort of an evergreen institution and the board members generally don't have an investment thesis. Almost all the time, they're chosen from outside that company's industry. So they have great life stories and super impressive people and a great business judgment, but they don't know the industry and they don't necessarily have a point of view about what they're looking for. And what we observed over these many years was that oftentimes this search degenerated into adjective based conversations. So we want a leader, we want a communicator, we want a technologist, we want an operator. And those are important criteria, but they don't specify to do what.

• 33:46Speaker 04

  Where we have found the most fruitful working relationship is where we can marry that judgment and network and wisdom of all these people with a specificity of mission that we can provide. And then some of the deep diligence on backgrounds of candidates, matching them to these missions, you end up getting to a good outcome because it is also hard for public companies in high profile searches to really do deep background without the help of a firm like ours that has expert networks and methods we can do to unpack a candidate's history very deeply and then do the kind of financial deductive work that I talked about in setting up these shadow P and Ls is also relevant for these CEO successions. We really love the synergies that come with what we bring to the table with public company

• 34:30Speaker 04

  ports because together it's a pretty powerful combination and everybody's stronger together.

• 34:35Ted Seides?

  As you're doing.

• 34:37Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 35:15Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 35:20Ted Seides?

  And now, back to the show.

• 35:24Speaker 03

  Research of something you might be interested in investing in. There's less information than say it was a private equity type company and you're behind the wall. What does that process look like before you get involved in a company?

• 35:36Speaker 00

  Mason has many strengths and geniuses, but the thing that first struck me about Mason's abilities as an investor was my first investor relations call when I was an analyst and Mason was a partner leading the call was how quickly he got from the reported financials to the actual cost structure and the actual unit economics. It's segment by segment, what's the pricing model? What's the mix of customers? The fixed and variable costs, specifically where are factories located? Where are people located? That analysis of let's just ignore what you see in the 10K. Let's just build up zero base.

• 36:19Speaker 00

  What does this business cost structure look like? That is by far, I think, the most important exercise that we do early in our due diligence process. And there's lots of different examples that bring it to life. Mason mentioned the Office 365 example where you could just say, okay, this is the number of users. Here's what the annual subscription could be. Where could that go over time? What's the direct cost against that? And you could create a profit pool. We do that in every single Case and that's usually just primarily with the company management and the IR team itself as a first step. And then we're validating it with people in our network who work in the industry. The second key thing is the evaluation of the people, the board, the management, the strategy.

• 37:04Speaker 00

  Because as I mentioned, we're trying to find situations where, yes, there are opportunities to improve. There's something that the market doesn't see. We always want to have a different view from the market, but we're looking for opportunities where management gets it in our conversations. They are getting positive energy over the interaction around strategy and what they could do to drive the value of their company. And we're assessing that directly and indirectly through our background checks and in the network. Those are the key things. It's a long process. We do a lot of first calls, fewer second calls, and we're trying to make two to four investments a year.

• 37:45Speaker 00

  So typically the cycle is at least six months before we're really sure that we have a good investment opportunity.

• 37:52Speaker 03

  How do you get the sense in advance if a management team is likely to engage with you on your vision of what could change at the business to improve it?

• 38:03Speaker 00

  We try to do it in a Socratic way. We're asking questions and they're responding and then we're getting to a shared understanding. When we do analysis on a business line's potential, we're going to put that in front of the management team and get a reaction. In that reaction, we're either figuring out, are we right or wrong? Which is really important. And also if we're on to something, how does management respond? Are they defensive or are they nodding and saying, yeah, this is right. It's an interesting way of looking at it. But it's important that what we don't do is we don't show up with a fully baked investment thesis after six months and a big stack of PowerPoint presentations and memos and say, here's your strategy.

• 38:46Speaker 00

  The best thing is for the company to lead the discussion of strategy publicly. They have to execute the strategy. So it's much better to get there in a back and forth iterative way. And then they're in a position to go out and make it happen.

• 39:02Speaker 04

  If you approach the problem with you're here to build something great, not take somebody down, it goes a long way, but you also can't over emphasize the value of 25 years of life experiences and insights that that brings because we just have a different conversation than others are having with them. When we're talking to the Salesforce guys about how to create packaging and bundling solutions for their products, we were there when Office 365 was being put together and how did E1 bundle versus E2 versus E3 work? And that's something the Salesforce people are interested in. How might that translate to them? I was on the board of a med tech company called CR Bard that had one of the highest margins in the industry and was quite early in developing the China market.

• 39:42Speaker 04

  And I went and went around Beijing with the CEO in 2011 and met PLA officers and saw their army hospitals and understood how that channel worked. And then back to the US and Salesforce, how many reps do they have? What were their quotas? How did this all work? And so when we go meet the next med tech company that's trying to do a global expansion and has under earning operating margins, Rob was shoulder to shoulder with me on that investment and can apply that to med tech companies in Japan or in the US. There's really no substitute for being inside the belly of the beast, working with people for a long, long period of time to get these little nuggets. Investing is about connecting dots, saying, wow, that connects to this. If this could be like that, what we're seeing in these numbers could be radically different.

• 40:25Speaker 04

  It's a creative act and it's an intuitive act and it's a relationship act, but it's also experience and knowledge lights all that stuff up.

• 40:32Speaker 03

  As you own a portfolio company over several years and things start to happen in how you had hoped and the company starts to make changes, improve the quality of the business, how do you think about selling or exiting the investment?

• 40:47Speaker 04

  You're picking at scab there, Ted, because as many of our LPs remind us, we sold a little too early on a couple of these things, including Microsoft and MSCI. So it's something as an organization that I like to learn and improve constantly. We've given a lot of thought to this idea. There are some investments where there's a discreet three to five year strategic planning cycle under which the company can execute a plan and then it's going to mean revert to the average equity return. There are other businesses, the best term I can come up with is they win by winning, which is the more they win, the more horizons open, the more adjacencies, the more second order business models, the more bolt-ons, the more bundles. We did this extremely well with CBRE from 2011 till about 2023 for about 12 years.

• 41:32Speaker 04

  We were a significant part of building the biggest real estate company in the world. One of our partners was chairman of the board of that company. And that's a lighthouse example of a place where the stronger the network got, the more services it could offer, the more global reach, the more sticky, and as importantly, the more important the mothership became versus all the individual brokers. As a human capital franchise, if you can be the place where the best people want to work because you get the best clients and the best clients want to work because you have the best people, now you've created something really cool. We have evolved our thinking on that to be more sensitive to this, building compounders for decades. We draw on this history, which ones work and which ones don't in this framework. Not everything can go for decades, but some can.

• 42:15Speaker 04

  We've been a part of unusually large number of those.

• 42:19Speaker 03

  What are other examples of, you could call it compounding knowledge, that you gained from one investment led to another?

• 42:28Speaker 00

  There are countless examples. We're always talking internally and externally about the through lines between different investments. There's a whole host of investments that are about the transition from analog to digital. You could put Microsoft in that category, selling physical PCs with Windows and Office licenses. You could put Adobe in that category, selling Creative Suite as shrink wrap software on a CD-ROM, transitioning to subscription. Xbox was our first exposure to the video game industry and that went from being a very difficult industry with lots of boom bust cycles, huge inventories required to

• 43:12Speaker 00

  distribute the software to a much higher quality business because of digital distribution and subscription. Probably the place we applied that insight the most, again, in the analog to digital example. Example was at Nintendo, historically very closed off Japanese company with we saw the best IP library in the video game industry. Because of a variety of different factors, they were behind the times in terms of adopting digital distribution, subscriptions, in-game monetization. We called on a lot of the things that we learned at Microsoft with the Xbox team to develop insights on Nintendo

• 43:54Speaker 00

  and to try to provide some insights to them on what the potential would be for their business. If they could go from selling 20% of their games through their own e-shop to 60 or 70% like Microsoft or PlayStation. If they could go from a small percentage of their customers on the Nintendo Switch subscription to the majority of their customers like their competitors. So analog to digital is one really big category.

• 44:21Speaker 04

  A little esoteric, but it relates to a few years later, we built a big position in Roblox because we understood the direction of travel of the video game industry was to massive multiplayer, user-generated communications and social dynamics into it. While Nintendo has closed the gap, will forever have the best IP in the whole industry. They were lagging in these things and then the absolute leader was Roblox. So I can connect learnings from Microsoft to Nintendo to Roblox. There are analogous lessons from the Roblox matching systems and algorithms and how they've used AI to pair you with something that some creator has made is super relevant for Disney, thinking about how to match viewers to

• 45:02Speaker 04

  a TV show or from Meta for an advertiser to an eyeball or for Expedia from a hotel room to a traveler. These online massive matchmaking business models that have a take rate based upon pairing you up with something that you're really going to love are undergoing a very significant technical revolution and have been for the last several years. It's really hard to overstate how connected all these issues are and what we learned from going deep in these companies and how it opens up new sourcing for us and new conversations with people and then new insights that are unique.

• 45:34Speaker 03

  As you go through that last list of companies.

• 45:37Speaker 00

  There are some, whereas an outsider, you might think you can get in there and have an influence. And there's another, say, like a meta. Are you really going to be influential in the boardroom or talking to executives? How have you thought about the importance of the degree to which you want to be influential in your investments?

• 45:55Speaker 04

  Rank ordering is always investment first, influence second. If you flip those, you're going to end up with mediocre investment returns. The number one thing is great company that we have a vision for and a unique insight into, that we think is differentiated from the street, that we can hold for a long period of time. And then secondarily, do we need to have a voice in it? It really does need to be belabored. Where I have seen companies go off the rails is when they flip that ambulance chasing, looking for a problem that needs to be fixed. You're going to have some serious adverse elections if you put the number two in front of number one.

• 46:31Speaker 00

  In terms of influence, because we don't think in terms of shareholder voting first and foremost, or shareholder rights first and foremost, or how successful could we be in a proxy contest? In our entire history, we've only had two proxy contests. Over 125 investments, 55 board seats, only two proxy contests. Because that's not how we think. We think that the way that you persuade people and you get influence is through good ideas and good relationships. It's not a problem for us if there's a founder who controls the company, if we think that we can achieve alignment with them, if we think in an adverse situation, talk to people that we know on the board that we have a relationship with.

• 47:14Speaker 00

  We've had a lot of successful investments that were companies that were completely or almost completely controlled. KKR is one example. We had great relationships. 21st Century Fox is another example. Spotify, another example.

• 47:34Speaker 04

  We've got to be the only quote unquote activist investors that have a body of working controlled companies. It's a long list.

• 47:39Speaker 00

  In the two situations where you were involved in a proxy, there's always this question of how deep do you want to get versus just exiting because you have the liquidity option in the public markets? What was the story behind why you would get into a proxy contest when that's not your normal playbook?

• 47:58Speaker 04

  The first one was in 2006. And as we laid out the history of the firm, we founded in 2000, 2002, 2003, the world changes with these scandals. It was our opinion that in that scenario, the corporate behavior was so egregious that we had to take a stand on principle for the shareholders. We couldn't let it stand. There was a lot of stuff in there that's in the public record. I don't need to restate it, but it sharpened our ability to intuit situations that are going to be intractable and has led us for most of the rest of the firm's history to avoid situations like that where we're going to get into loggerheads. So that was 2006, and that brings us to probably 2022.

• 48:38Speaker 00

  The second one was in Japan. It was the largest ever proxy contest in Japan, a company called Seven and I Holdings. Very similarly to what Mason described in the situation at Axiom in 2006, we thought that the corporate behavior was so misaligned with the general shareholders that it was the right thing to do and B, that we would make a better return on our investment if we pursued that proxy contest. We have three major constituencies outside the firm. We have the people in the walls of the firm who are very important, but outside of the firm, we have our investors, number one, who trust us and they're really important. And we have two constituencies that I would put on equal footing.

• 49:23Speaker 00

  The boards and the corporate management community and the institutional shareholder community. Our relationships with both are very important. We need to have credibility to influence management and we also need to have credibility with other shareholders who, in some cases, can be advocates for us or can get aligned on a strategy that makes sense for the company and can be influential as well. When are we going to do a proxy contest in the future? I hope it's never, but if it does ever happen again, it will be because we're so convinced that we're going to make a great return. We know that a lot of other investors that support us are on the same page and we think

• 50:06Speaker 00

  the situation is so egregious that we can easily explain it to. The corporate community and our reputation will be intact. That has proved to be the case in both of those situations.

• 50:18Speaker 03

  Through several of those examples, you described two quite different investments in Japan. Nintendo, which was pulling the same thread, and then Seven and I, which turned into this proxy contest. How have you thought about the aspects of the playbook that you've applied in the US now being much more involved in Japan?

• 50:39Speaker 00

  We've been looking at Japanese companies since 2013. It's been a long time of looking at companies and engaging with them. We've seen a lot of change during that period of time. We made our first investment in Japan in 2017. What attracted us was that there are so many great companies. If you look at the companies in the world with over 40% gross margins, 40% gross margin is our proxy for pricing power, business quality. The number one market is the US with about 1,000 companies with over a billion market cap and above 40% gross margins. The number two market is Japan with 250. After that, you get to numbers around 50 to 100 in countries in Europe.

• 51:23Speaker 00

  A lot of people talk about Japan and they talk about the valuation, the low price to book. We talk about the quality of the businesses. There are lots of great companies there. The issue was that there was not a shareholder oriented corporate governance system. We talked about the diseases of abundance. Great companies have lots of opportunities to say yes. They get distracted and unfocused. In Japan, under their corporate governance system, prior to 2012, 13, when the corporate governance reform kicked off, disease of abundance was everywhere and there was no really corrective mechanisms in the public markets. But that all started to change in 2012, 13. Abe came to power. He emphasized corporate governance reform.

• 52:07Speaker 00

  There's been a big generational shift in Japan of corporate leaders who looked at in a period of economic and market malaise and want to improve productivity of their companies, improve the productivity of the economy. That generational change happened at the same time as the corporate governance reform. By 2017, we thought, there are great companies, let's see if our model can be successful. We received a lot of advice about ways that we should try to adapt our model to be successful in Japan. But Mason and I thought, we should see if our approach with as little change as possible can be successful. We started with one investment in Olympus.

• 52:52Speaker 00

  Olympus was perceived as sort of a multi-industry holding company. They had a camera business that was quite well-known publicly, but that business had been challenged by smartphone cameras. What was left was an incredible medical device franchise in GI endoscopes. We thought that they could build a strategy around that business and we were able to sync up with a management team that saw the same opportunity. But what we didn't do was try to change the way that we would approach the engagement. There's no special category of competition for Japanese companies, or European companies, or American companies. We're in a globally competitive world. The approach that we've taken for Olympus and every investment since then, including

• 53:36Speaker 00

  Nintendo, including Seven and I, is to try to have very high standards for competitive success for the companies. At this point, we've invested over $7 billion into Japan since 2017. Twelve publicly disclosed investments, many others that haven't seen the light of day. We find consistently that there are management teams that want to up-level their performance and they care about their share price and they are trying to create value for stakeholders.

• 54:07Speaker 03

  What are some of the differences that you've found in your engagements in Japan?

• 54:10Speaker 00

  Someone said early on that in the Japanese languages, there's six different ways to say yes and five of them actually mean no. To some extent, it's an exaggeration, but decoding the communications has been the biggest challenge. Our approach just naturally to be polite, humble, empathetic, but direct has worked well getting through differences in communication. We have a great team, including people who are Japanese natives who have upped our game in that regard. One thing that we've learned to focus on is when you hear yes, you always have to ask, yes, when? Because yes can mean yes, but in 10 years after I've retired.

• 54:53Speaker 00

  And you want to make sure that that's not the source of the misunderstanding. That is always a source of tension in our investing is we like to have a sense of urgency. We acknowledge these things are difficult, but if you're not in full strategic alignment with where you need to go, the best time to get there is tomorrow. That's the central challenge for aligning on the direction and aligning on the timeframe and how to get there.

• 55:19Speaker 03

  With the depths of engagement concentrated portfolios you run, I'd love to ask you about mistakes. There was certainly Valiant back in the day and others where something happened that didn't go as you thought it might.

• 55:34Speaker 04

  We can do a whole separate podcast on mistakes. We do reminisce on them a lot and we try to learn from all of them and they span issues of portfolio concentration. We manage the portfolio slightly differently under my management than under Jeff's. We are more discerning about the types of problems that are really perfect for our kind of engagement. It's easy to get a company to shift its allocations away from making Windows phones to focusing on Office 365 than the one we took on at Rolls Royce, which was how do we engineer your engines to have a lower cost of goods than what they currently have and try to get them to GE's standard of excellence with a workforce in the UK.

• 56:19Speaker 04

  It also didn't help that one of their engines was recalled by the FAA and then COVID hit and grounded all the fleet in the world. Fundamentally, that was a biting off more than we could chew type problem. When we make mistakes, we refine, what are we good at? What are we not good at? What can we learn from this?

• 56:36Speaker 00

  In investing, you're going to get some things wrong. Making sure that you size the things that you get right versus wrong is really important to your overall result. Another is to just let the team be explicit about what could go wrong. We have this idea of the value act thesis. What's our point of view? What is the market's point of view? We want to think that we're going to buy at a discount. That will close the gap. That will drive the share price up. That framework's important. Mason has added to that. What is the antithesis? What are the things that you could honestly write the story of? How does this go wrong? Let's talk about it. Let's think about how correlated those things are to other things in our portfolio and how will the company perform in that situation?

• 57:19Speaker 00

  And that leads us to just try to focus the portfolio in things that have a very attractive risk-reward skew where we think the downside is limited, it's protected, we have a margin of safety. If we're right, if the market comes around to our point of view, if management executes, we can make a significant multiple on our money. There are lots of mistakes that we've made, some on a small scale, some like Valiant on a larger scale, that have led us to those lessons.

• 57:49Speaker 04

  We call that the value act triangle. Our thesis, the market thesis, and then the antithesis, and we write them out very explicitly. And then we run down that antithesis with as much intensity as the thesis. People in investing tend to get wrapped up in the stories that they've got behind the stock. You've got to run down that really scary thing. In the aftermath of Valiant, we made an investment in Morgan Stanley, which was a G-SIFI bank not too long after the great financial crisis. It was eight years after, but it still felt recent. And I said, well, this is an industry that's hated by a lot of people in government and people in our society. Let's go meet with them. So we went to Capitol Hill and we met with this banking committee and we went to the Fed and we talked about regulators and we even went to try to get in to visit Occupy Wall Street so that they could give us their point of view. They told us we were Wall Street, so they refused to meet with us.

• 58:34Speaker 04

  But we found that there was a play on Broadway that was a taking on banks and private equity. We called the play write up. If you're going to have an investment that might have a severe downside, however remote that might be, you have to understand it from every angle. That might have been a overkill because of its timing and firm history, but that gives you a sense of how seriously we take that other side of the coin.

• 58:57Speaker 03

  I'd love to ask you a couple of questions about the business of Value Act itself. The first that comes to mind is so much of what you're describing feels like the playbook out of private equity. I'd love to hear if you've thought over the years about either having a sleeve or a strategy, or I imagine there are companies you're involved with that at times could be take private candidates.

• 59:19Speaker 04

  We have rolled into take privates of a couple of our portfolio companies, but very few. In investing, you have to be very good at one thing. That white space that Jeff identified 25 years ago, that nobody is playing this, think like an owner, long-term business builder in public markets remains true to this day. It's a white space and we are the best in the world at it. That's where we need to stay focused because we're not going to be the best private equity firm in the world. We know how to work when we don't have a board seat at a company, when we have an NDA at a company, when we have one out of 10 board seats at a company. We know the ups and downs, booms and busts and bubbles can warp public company thinking. We have a depth of relationship with the people that vote all the shares,

• 1:00:03Speaker 04

  whether that's BlackRock or State Street or T. Rowe Price or Fidelity. We've got those people in our corner. We understand how to navigate as a minority, sometimes even a very small minority shareholder. We've built expertise in this one narrow thing and we're good at that.

• 1:00:19Speaker 00

  If you abstract it as private equity, trying to choose a great business, invest at a great price, have the company have the right strategy, create the right incentives, yes to all those things. And those are all things that we're also trying to do, but the execution is very different. I worked in consulting, a lot of the projects were private equity due diligence. When those projects kicked off. We knew that we had a three month period of time for the initial consulting presentation that would go into the investment committee to make a decision on a first bid. And there would be another one month, they'd have an opportunity to make their final bid. And that would be a defined auction. In the meantime, not just the business due diligence, but the accounting diligence,

• 1:01:04Speaker 00

  the tax diligence, all the management meetings, the data room is populated with perfect information. That process is trying to accomplish the same thing that we're trying to accomplish. But we don't have the data room. We don't necessarily have four months to make a decision. We have a share price today. We know what it is today. We need to deduce whether it's a good investment. Now, we generally take three to six months to make a decision. But in the meantime, we can be buying the stock, interacting with management, getting iteratively more confident. And then when we're trying to create the right strategic alignment, the right incentives, that's taking place mid course as opposed to mostly at the outset, like a private equity

• 1:01:49Speaker 00

  firm. We think along the same lines and we have rolled as a minority investor into some private equity deals. We just have one such case in Japan with a company called Topcon, which is being taken private by KKR and JIC Capital. And we'll probably have other opportunities to do that.

• 1:02:10Speaker 03

  Other aspect I want to ask you about is communication strategy. Part of the toolkit you talked about when you go to your companies is making sure what they're doing is aligned with how they're communicating with their shareholder base. Despite all of the very engaged work you've done with companies, and particularly in the world of activists, you've not been in public. Would love to hear your thoughts on how you've approached value acts, communication strategy to your clients, to the investing world.

• 1:02:40Speaker 04

  We've been much more comfortable behind the scenes. Some of it's personality, some of it's culture of the firm and some of it's expediency. It's just people will generally be more inclined to work with you if you're not going to go on the front page of the Wall Street Journal and say, that was me. It never is us. It's always a team effort and we're very happy to let other people narrate their own stories and they do deserve more of the credit than we do. That makes for a sales challenge. When you're running a business and have to promote your story, people tend to overstate and sell and celebrate and wave the flag. And that's just not what we've done. That's the downside we've just chosen to accept of the methods that we use and the culture that we have and the mission that we're on.

• 1:03:20Speaker 00

  It's authentic when he says that we don't deserve the credit because there's not just the CEO and the board. Usually when we're investing in a company, there are a lot of people inside the company who see the exact same opportunity that we see. It's almost never the case that we have some idea that nobody in the company has ever thought of. There's usually a troop of people who are celebrating when we get the CEO to pay special attention to the idea that they already had. Those people aren't going to get the credit either. The reality is that maybe nobody deserves the credit because it's a collective exercise. We tell our story to our own investors. We don't do much in public.

• 1:04:04Speaker 04

  That's why we're grateful to have this opportunity with you, Ted, because it does require long form. Most media orients around conflict, around hero villain, A versus B. First of all, it isn't really how the world works. Companies are not monoliths or autocracies run by one person and everybody thinks the same. They're tribes and communities of people with lots of different ideas. And most of the time we're coming in and being part of the conversation and empowering one group and their point of view and being part of the gradual shift internally rather than this A versus B. And that's just not the story the newspapers want to write.

• 1:04:38Speaker 03

  I'd love to ask for any other reflections that you have that we might not have talked about over this last quarter century of investing.

• 1:04:47Speaker 04

  There are elements of the culture that were put in place from the very beginning that I think have served us really well. We all have the vast majority of our net worth in this product. We eat our own cooking. We all get paid on the performance of the whole. Nobody gets paid on their idea or their sleeve of it. And those two things have led to everybody on the team rooting for each other, supporting each other and working with each other rather than compete. You don't want the other guy's idea to blow up and go terribly so that you can get his sleeve of capital into your book at all. It's also had this thing that I really benefited from is that if you're running your own book, you're going to be very scared. And when things leg down is a lot of our best investments went down 20% before they went up 200%.

• 1:05:30Speaker 04

  You're going to stop out and panic and freak out. But if you're on a team, you can press that bet and your ability to take risk and ride the J curve is so much more enabled when you aren't about to be stopped out and fired on the first leg down. This culture of we're all in this together, we're here to help each other and the way that we take risks and the way we think about the world has been enabled by how we built this organization. It's also extremely flat. I remember somebody coming in for a performance review one year and saying, what do I do next year? How does my job look next year? And I said, look at me, I do basically the same job as you. We're at the destination. I should be building models and getting my hands dirty with customer calls and you get to come to meet the CEO and have dinner. That's just the way we work this place.

• 1:06:13Speaker 04

  That lack of hierarchy is important. Somebody came from another firm who shall not be named and he said at that firm, the people on the lowest part of the totem pole want to do as little work as possible. The ones in the middle want to get done as many deals as possible into the book and the ones at the top are looking down and thinking everybody's lying to them. And I was like, well, that's not the layer cake we want. We want everybody working together thinking we're all telling the truth. That is something wise that the founders of this firm put in place and we've carried forward. The idea that the snowball effect of relationships, networks and life experiences gets stronger and stronger over time. As we are entering what may be the fourth industrial revolution in terms of AI, there's a lot of change in management that's going to have to happen at a lot of companies and

• 1:06:57Speaker 04

  a lot of securities that are going to fall out of bed. Having that 25 years of history, being part of some of the biggest previous platform shifts, PC to cloud, linear television to streaming television, we have a lot of pattern recognition and a lot of people in our corner to help us work through that. With all these building blocks, we're locked in on a lot of fascinating projects in the portfolio of today with some of the companies that will be among the most important for the next decade. I get up every day loving my job. This is the best job in the world to think critically about the world with a group of people

• 1:07:36Speaker 04

  that you like and respect and this army of advisors and to be building and not just trying to make a trade on a quarter, but actually building the most important companies for the next century is a real honor and privilege and I feel very blessed.

• 1:07:51Speaker 03

  I think that's a great place to turn to a couple of fun closing questions before I let you both go. So Mason, let's start with you. What's your favorite hobby or activity outside of work and family?

• 1:08:01Speaker 04

  I play guitar and a little piano and drums and write songs in my little recording studio in my basement. Some of these are on Spotify. If your listeners look really closely, they might be able to find these things. They'll find that they are somewhere in between embarrassing and mortifying.

• 1:08:19Speaker 00

  I've had the opportunity for Mason to play behind me for my very mediocre karaoke vocals on the guitar at some of our events. So that's always fun.

• 1:08:28Speaker 04

  There was Roadhouse Blues by the doors. It was incredible. We should put that tape on maybe as our outro music on the set.

• 1:08:35Speaker 03

  He's a great guitarist. Rob, what was your first paid job and what'd you learn from it?

• 1:08:40Speaker 00

  I worked for a house painting crew when I was 15 years old and growing up in Massachusetts. My parents were very focused on that I have summer jobs and actually do manual labor. I thought that as a house painter, that on the spectrum of manual labor, that was going to be a little bit easier, but I didn't understand that when you're the most junior member of the paint crew, your job isn't to put the paint on, it's to take it off.

• 1:09:07Speaker 00

  Up on the ladder, 95 degree heat, scraping paint all day, inhaling paint chips despite the mask I had on. It was the first lesson in hard work. Also, we had a foreman who was an excellent leader of the crew and patient with me and made it fun. He kind of set the tone, got everybody working hard in some very hot summer Massachusetts days. So seeing that benefit of leadership was also key.

• 1:09:32Speaker 03

  Let me ask you both separately. What was the best advice you ever received?

• 1:09:37Speaker 04

  Sascha Nadella was a huge influence on me. I was still fairly young when I was working with him and he had this mantra that the learn it all always beats the know it all. First of all, nobody wants to work with a know it all. You're not going to get to the right answers unless you have a learn it all mentality. A decade later, when I started working with Marc Benioff, he had his version of this, which was the beginner's mind, that there are many possibilities to the beginner's mind, but to the expert's mind, there are few. That is also very profound. We are all generalists in every industry we invest in. None of us have this hard baked expertise. We come in with these basic generous questions that often unlock things that nobody's really talking about. Those two together, learn it all and beginner's mind are the best.

• 1:10:19Speaker 00

  When I went to college, both my father and mother said, don't choose classes, choose professors. I didn't really know exactly what they meant. It took a year of stumbling through some subjects that I thought might be interesting, but didn't have great professors to finally get the wisdom. Tried to carry that forward into my career, making sure that I was choosing mentors, choosing people I worked with. The inverse of it is people don't quit their jobs, they quit their boss. And so as I think about people who work on our team, make sure to keep them engaged, be generous with my time and make sure that I'm serving them in addition to doing my own job.

• 1:10:58Speaker 03

  One more. Rob, we'll start with you. What life lesson have you learned that you wish you knew a lot earlier in life?

• 1:11:04Speaker 00

  Learning that it's okay to cut your losses and move on to change your mind. Learned that from Mason probably more than anyone else. As you get into an investing career, that's really important because there are going to be some situations where you're wrong and sometimes it makes sense to be persistent and stick with a situation and sometimes it's better to cut your losses and move on to the next thing.

• 1:11:27Speaker 04

  Maybe the other side of that coin, and I learned this from Rob, is that in every setback, there's an opportunity. Rob is very steady handed and I'm a little bit more emotionally expansive. And so when things go really wrong, Rob is utterly cool customer and figures out how there's actually a blessing in this and how we're going to make something good out of this.

• 1:11:47Speaker 00

  Mason, Rob, really appreciate you both taking the rare opportunity to share your story. Ted, thanks a lot for having us. It was great conversation.

• 1:11:54Speaker 04

  Thanks Ted and thanks for all you're doing for the industry and we're big fans of the show and lots of our friends and people we respect and even some of our clients have been guests on your show and we really are happy to be a part of it.

• 1:12:07Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings and sign up for premium content, including podcast transcripts, my investment portfolio and a lot more. Have a good one and see you next time.

• 1:12:30Speaker 05

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.