Prof G Markets: The Most Profitable Year in Banking History, Elon’s Tesla Stake, and Firing People

Scott shares his thoughts on Elon Musk’s demands for a 25% stake in Tesla. He also takes a look at the latest bank earnings and breaks down why 2023 was the most profitable year ever for JP Morgan Chase, while Citigroup swung to a loss in the fourth quarter. He also discusses best practices for firing or letting people go. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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

• 0:00Speaker 00

  Flowing ad budget on metrics that look great till the CFO sees them. That's bull spend and marketers are calling it out in dashboard confessions.

• 0:09Speaker 01

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• 0:17Speaker 00

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• 0:30Speaker 02

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• 0:59Scott Galloway?

  This week's number 99. That's the percentage of the American population that lives in a county with at least one Mexican restaurant. True story. I like to masturbate fully naked. If you don't like it, go to another Chipotle.

• 1:23Scott Galloway?

  Welcome to Prof G Markets. Today, we're discussing Elon's Tesla stake, bank earnings and a firing on TikTok. True story, Ed, I have a lifetime. I used to talk about Chipotle a lot, which I absolutely love. And they sent me a lifetime Chipotle. I can walk into any Chipotle with this card, which I've since lost. And order a meal and it's free. My kids, it's like literally my kids are totally blown away and think my job and career has merit now.

• 1:52Ed Elson?

  So you got super rich and they decided to give you more stuff for free. That's an awesome deal.

• 1:56Scott Galloway?

  I think it's important that wealthy people get free stuff. I just think it makes sense. It makes sense.

• 2:02Ed Elson?

  Yeah. By the way, just on the, on the, your opening joke, I got two comments last week. One was from my friend's mom. It was like, That last week's joke was totally inappropriate. Then the other, this other dude came up to me at the gym. He's like, oh, you at else. I'm like, yeah, I'm like, oh yeah, I love the podcast. I was, I was listening to it this morning. I'm trying to get my girl into it, my girlfriend into it. But we listened to the first, first five seconds and Scott started talking about how his wife fucks him in the ass with his, with her massive cock. So she doesn't really like it. Apparently girls don't really like the, um, the anal.

• 2:38Scott Galloway?

  What about women, Ed? What about women?

• 2:40Ed Elson?

  Women.

• 2:41Scott Galloway?

  Yeah, yeah. Anyways, get to the news, you, you, you, you. Anyways, what are we discussing?

• 2:47Ed Elson?

  Let's start with our weekly review of market vitals.

• 2:56Ed Elson?

  The dollar rose, Bitcoin dropped and the yield on 10 year treasuries climbed. Shifting to the headlines. A federal judge blocked JetBlue's $3.8 billion deal to buy Spirit Airlines, saying a merger would restrict competition and lead to higher fares. Spirit's stock cut in half after the decision on Tuesday. Uber is shutting down alcohol delivery app Drizly after acquiring it for $1.1 billion three years ago. Uber intends to prioritize the core Uber Eats strategy, helping customers get anything from groceries to alcohol on one single app. U S Bitcoin ETFs pulled in $871 million in the first three days of trading. Investors turned to BlackRock and Fidelity for new crypto products as the higher fee grayscale fund saw outflows of more than $1.1 billion.

• 3:42Ed Elson?

  For the first time ever, Apple surpassed Samsung as the world's largest smartphone manufacturer by units shipped. Apple now holds a 20.1% market share over Samsung's 19.4%. In terms of revenue, Apple dominates with a near 50% share of the entire market. And finally, chip design software maker Synopsys plans to acquire Ansys in a $35 billion deal. That would be the biggest acquisition in the tech sector since chipmaker Broadcom took over VMware last November. After the news, Synopsys shares were up 3.8% and Ansys shares were down 4.8%.

• 4:21Ed Elson?

  Where do you want to start?

• 4:22Scott Galloway?

  Spirit and JetBlue, definitely the Biden administration is much more kind of antitrust friendly or merger unfriendly, if you will. The thing that struck me about this was that Spirit Airlines on announcement that the deal wasn't going through, it dropped, it got cut in half. Now that it's been blocked, JetBlue owes Spirit $470 million breakup fee. So it's weird, it got cut in half despite the fact it's scanning almost a half a billion dollars.

• 4:47Ed Elson?

  A year ago, when it was a bidding war, I don't know if you remember, it was a bidding war between Frontier and JetBlue. The Spirit CEO was very vocal, saying to the shareholders, don't vote for JetBlue. It's unlawful and it won't be approved because JetBlue is too big. And he was trying to drum up support for the Frontier acquisition because yes, it was a smaller offer, but it was more likely to go through. It didn't get enough support from the shareholders, so the Frontier deal falls through. And then as soon as that happens, Spirit CEO turns around and he says, we've reached an agreement with JetBlue, we're really excited about it. And then he spends the next year explaining why the deal is lawful and why it would promote competition. So it's like a complete 180 from what he was originally saying.

• 5:31Ed Elson?

  And I think the way he's handled this illustrates the truth of this situation, which is the deal was never going to go through. And the fact that JetBlue CEO thought that it might demonstrates, in my view, probably some incompetency, because now they have to pay this $400 million fee to Spirit shareholders. They also have to pay a $70 million fee to Spirit the company, and they look really stupid now. And then, surprise, surprise, the JetBlue CEO is now stepping down.

• 5:58Scott Galloway?

  Yeah, I mean, I hate the airline industry for the most part, the bailouts. You know, the five CEOs, the biggest airlines, the four CEOs collectively paid themselves like $150 million the year before COVID, and then went hat in hand.

• 6:13Ed Elson?

  Such a joke.

• 6:14Scott Galloway?

  Then went hat in hand to the government during COVID, saying, we're all in this together, they're just so full of shit. It's just a very difficult business. It's labor intensive, it's capital intensive, it's subject to all sorts of exogenous impacts. So it's weather. Or I mean, it just or consumer trends or pandemic. You know, Warren Buffett famously said, if he had a time machine, you'd want to go back and kill the Wright brothers. That the airline industry has just been terrible, terrible for investors. Drizly, this one was weird to me because I couldn't discern whether this is a billion dollar acquisition that didn't work and they're just calling it a day, or if they're just getting rid of the brand, you know, which has been rolled up into the larger food offering. Do you have any sense for what's going on here?

• 6:57Ed Elson?

  Basically, that, I mean, the story Uber is telling, that this has kind of been the plan and that their, their long-term plan is that they just want to consolidate all delivery into one app. And that app is going to be Uber Eats. And then they've also made statements about why it's actually not a big deal, which honestly, I believe, for example, they're like, alcohol sales doubled on Uber Eats last year. Also, the majority of Drizly users already have Uber accounts. Also, they still keep all the backend tech, like they have this proprietary ID technology that lets retailers identify and verify the age of their customers. And that's something that Drizly designed and then Uber scooped up when they acquired them.

• 7:41Scott Galloway?

  This feels to me like another example of the corporate communications department not doing a very good job. And that is, this came off as a foul ball. It came off as Uber was, you know, calling uncle on a terrible billion dollar investment, when it might have been just brand architecture move. And then Apple selling more smartphones than Samsung. Most people would credit Apple with a lot of sort of seminal or iconic business strategy moves. But I think the one that doesn't get enough attention was in 2001, Steve Jobs decided to take money out of pre-purchase broadcast advertising and they opened their first store in Tyson's Corner at the, you know, when, if you think about it, you go back and what's so visionary about this, is this was a time when Amazon was coming

• 8:24Scott Galloway?

  online and the general consensus was that stores were just going to go away and we're going to no longer play a role, that we were all going to be ordering everything online. And what I think Jobs recognized was that branding and brand is the core asset of Apple, they get above market margins. Just real quick, I was on the board of Gateway Computer. I don't know if you know that, Ed, but at that time, we sold more computers. We sold three times as many computers as Apple, but our margins, get this, our gross margins were like 6% and Apple's margins were 30%. People pay so much for that self-expressive benefit, brand Apple. So the brand really is key and there's kind of three components to branding. Pre-purchase advertising, loosely speaking, purchase, distribution, and then post-purchase loyalty programs, warranty, et cetera.

• 9:08Scott Galloway?

  And what Jobs recognized was that the sword of pre-purchase branding, specifically television advertising or print, that sword was getting duller and duller. So 40 years ago, an ad on the Academy Awards cost a fifth as much but reached five times as many people or offered 25 times their ROI. Or put another way, the ROI has gone down 96% over the last four decades. And he recognized this and said, well, people still have to buy shit. So if you looked, if you really examine the channel and hardware, the distribution channel was really desperate. If you ever wanted to fix a computer or buy a computer, you went into like Egghead Software or CompUSA or Circuit City, and then they opened these temples to the brand.

• 9:51Scott Galloway?

  And it has, I think it has been the difference between Apple becoming the strongest brand in the world and Samsung losing share and just not offering the same or not being able to have the same type of margins in their product. And I have, I consulted to the CMOs of both Nike and Samsung. And my message 15 years ago was the same to both. They need to get greater control of their distribution in order to maintain the type of brand equity and margins they've become used to. One listened, the other did not. Samsung actually opened a store, wouldn't even call it a store because they weren't selling anything in the Meatpacking District, and it just felt stale. There was no life to it. It felt like a museum. No one went. You went once and that was it.

• 10:34Scott Galloway?

  And the Apple stores are just, they're just incredible. So the downstream or the verticalization of Apple, the huge investment kind of swimming upstream or being a contrarian, zigging when everyone was zagging, it ended up being, in my, in my view, one of the kind of the pillars of it becoming the most valuable company in the world.

• 10:54Ed Elson?

  The craziest part is that the iPhone is still seen and priced as this luxury product. And as you Talk about and teach about like the number one rule of luxury is limited supply. Like that's what allows Hermes to price a bag at 10,000 because you walk in and you're not allowed to, you're not able to get a bag. This almost defies economics because this, that's not the case with the iPhone. It's now the most popular smartphone in the world. And yet it's still priced at a thousand dollars per phone. It's still the most expensive. It's still this aspirational brand.

• 11:28Scott Galloway?

  Well, just as the idea of a virgin giving birth to the son of God kind of defies the natural order or suspends all rational belief. What Apple has pulled off is kind of suspends the natural order. In the world of marketing, it just, it defies gravity and it's pulled off what as far as I know, no other brand has pulled off before. And then let's talk about Synopsys to acquire Ansys. A lot of sis is in here. So Synopsys, I didn't know this, is the largest maker of software used in chip design. The stocks that have really outperformed over the last decade, maybe more than that last 20 years, kind of have all one thing in common, at least the majority of them. And that is they're

• 12:10Scott Galloway?

  an asset light model. And to a certain extent, you know, you don't want to own apartments. You want to build a layer of software on top of them so people can rent them out. You don't want to own a car. You want to create a level or a thick layer of innovation or software on top of it such that you can rent them out to other people. And obviously that's Uber. But these asset light models have really dominated the most valuable company, I would argue in AI right now, Nvidia, they design and then they rent out other people's manufacturing. And this, this is, this is interesting. I don't know much about it. Do you know anything about this deal?

• 12:46Ed Elson?

  Well, biggest in the tech sector ever, if it goes through. To me, the big reminder is like, Boring is sexy because, you know, I'd, full transparency, I had never heard of Ansys before this. And maybe I'm just dumb, but I also read business news for a living.

• 13:02Scott Galloway?

  I think both of those things are true. I think, I think those things can exist at the same time, Ed. Great. Great. Doing your job.

• 13:10Ed Elson?

  Well, hold on, I was saying something which is boring is sexy. So here's what I do know about Ansys now. They make engineering simulation software. Basically, they'll go to an airplane maker and they'll say, instead of physically testing your airplane, we'll just simulate a bunch of real world scenarios that you don't have to spend all this time and money building and crashing planes. And that's literally all they do. And so I guess the lesson for me here is like, if you can build a product that no one else is building, whether that's because your product is super complex and you need to hire a bunch of crazy smart engineers and get them out of like academic institutions, which is what Ansys has done, or maybe just because other people don't really care about the problem that

• 13:54Ed Elson?

  you're solving because people don't know about it. But if you can do something that is extremely niche that no one else is building, you're going to make a shit ton of money. And it doesn't matter if you're a household name or not. It's being sold for $35 billion, which is almost double what Adobe was going to pay for Figma. And based on the stock movements, the market believes this is going to go through. We'll be right back after the break with a look at Elon's Tesla stake.

• 14:30Scott Galloway?

  Support for the show comes from Bilt. Most of us work hard to earn our keep, but usually there's no one around to hand you a cookie when you successfully pay your monthly housing bill. No one except Bilt, that is. Bilt has expanded from the original renter rewards program, and they have a lot more going on for members now. For example, members can earn points on mortgage payments, too. Every housing payment gets you points that get you a lot more than baked goods, such as flights with top travel partners, including United and Hyatt, Lyft rides, amazon.com purchases, and much, much more. Here's another benefit of Built membership. You also get access to what they call a neighborhood concierge. You can make restaurant reservations, book fitness classes, and find new local spots, all while rewarding you and more than 45,000 merchant partners. It's simple. Being a renter and now owning a home feels a lot better with Built.

• 15:15Scott Galloway?

  You can download the Built app and join the membership for where you live at joinbuilt.com/profg. That's J-O-I-N-B-I-L-T.com/profg. Use our link so they know we sent you.

• 15:29Scott Galloway?

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• 16:14Scott Galloway?

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• 16:36Scott Galloway?

  Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch-up. When audit season comes around again. Vanta works differently. The regentic trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400 plus integrations, Vanta collects evidence and monitors your controls year round, cutting your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools, including Claude or Cursor. Want proof?

• 17:21Scott Galloway?

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• 17:47Ed Elson?

  We're back with Prof G Markets. Elon Musk wants more Tesla stock. In a series of posts on X, Musk wrote that he wants 25% vote to control over the company. Otherwise, he'd take his AI and robotics ambitions elsewhere. Musk sold about $40 billion of his shares in 2022 to finance his purchase of Twitter. Still, he remains Tesla's largest shareholder with a 13% stake. Scott, Elon is basically pressuring the board to double his stock. Have you ever seen anything like this before?

• 18:16Scott Galloway?

  Yeah, this happens all the time, but in a much different format and much less aggressively. I have been on the board of several companies where the CEO stamp scissors her feet over the compensation and threatens to leave. I've even had one CEO kind of threatened that he would walk down the street with his team and start another company. And we came close to actually firing that guy. Oftentimes, there's a bit of jockeying around compensation between the board and some implied or implicit threats, especially in private companies. It's really unusual in public companies. And what's so unusual about this is that if you take a step back and really think about what's going on here, Elon Musk is the wealthiest man in the world. How did he become the wealthiest man in the world?

• 18:59Scott Galloway?

  Mostly through his stake in Tesla. So the company that made him the wealthiest man in the world, he is saying to the board, if you don't pay me an additional $70 billion, which would be the value of the options they would need to award him to go to 25, I am going to take all of my ideas and start deploying them in a different entity that competes with Tesla, but I expect to still be around at Tesla. I mean, there's about five different things in that that most boards would fire the CEO for. I've never heard of anything. We've never just seen anything like that. And for him to start shitposting the board publicly and putting, you know, negotiating in public, I've never seen that before. Usually it's private.

• 19:44Scott Galloway?

  And at some point, if this were a normal company with normal directors, basically, directors usually are what I call, refer to affectionately as FIPS. FIP is formerly important people. And if some guy started threatening to take his ball and take it somewhere else, and we had already made this guy the richest person in the world, they might ask that person to leave, or they might just say, sorry, boss, we're not giving you more. You're already staked. And oftentimes, and I've been on boards with companies where the CEO wants more shares. And this happened to me. What my, my boards have said to me is, you own so much of the company, Scott, that you're kind of fully staked. We don't feel a need to give you more. You're good. But this board is different. The compensation committee of the board, although I don't know if this board even pays attention to its committees.

• 20:29Scott Galloway?

  I mean, the problem is there's so many conflicts. They all want to be this guy's buddy and have a chance to invest in his other ventures. So he kind of controls the board. He also has brothers on the board, which is ground zero for poor corporate governance. Strikes me that anyone that goes on this board really has, you know, there's only one requirement, and that is you do whatever the fuck you want. And people on the other side would say, well, as long as he continues to create this sort of shareholder value. You know, he should kind of be able to push the board around.

• 20:59Ed Elson?

  What do you think about that? I mean, he's 10x the value of the company in the last five years.

• 21:03Scott Galloway?

  I don't care how powerful you are. At some point, there have to be guardrails. There has to be somebody in your life that says no. Otherwise, it's, it sort of goes to what are the keys to negotiating? And there's really only two things you have to remember. The first is to not be emotional. Don't make it win lose. Don't get angry. Just realize they might have different objectives than you. That's fine. And second is to always show a credible willingness to walk away. I've never done a deal. I've never sold a company or bought a company where at some point one party didn't walk away. Because until someone does, they just keep bumping and making the terms worse. When I was doing my deal to sell L2 to Gartner, they kept popping up and asking for more and more stuff or reducing the price. And then finally I said, I'm out.

• 21:47Scott Galloway?

  I, you know, sent them a letter saying, we are, we've asked for you to release this from the exclusive here. We're done. And then that's when they came back and gave us what we needed and said, we're going to close. At some point, somebody has to say no to this guy. Otherwise, I think it just gets worse.

• 22:03Ed Elson?

  Well, let's, I guess, let's just go through the actual possible scenarios. So what Elon's actually asking for isn't necessarily 25% of all the shares. He just wants 25% of the voting power of the control of the company. And one of the things that he suggested that he would be down for is a dual class shareholder structure. But then he also points out, but I am also told it's impossible to do that after an IPO. And then he went on a rant complaining about how it's stupid that that, that it's not possible. Now, I think what we should, what's worth mentioning is what, at least from a first glance view, there's not total certainty over whether it's impossible to switch back to a dual class structure.

• 22:47Ed Elson?

  Because just when you look at history, Ford had an example where the shareholders voted on switching from dual class to single class. So there's a possibility, or we should at least take it with a grain of salt, his assertion that we cannot do this after the IPO. Then there's the other option, which is Tesla. Could in theory sell itself to a new co which has a different shareholder structure.

• 23:12Ed Elson?

  And then there's the possibility of, you know, they just say no. But I think the most likely scenario would be what they did in 2018 where they said, we'll give you all of this money or this stock, but you have to hit certain performance metrics and we're going to make those performance metrics absurd. And what he did in the past five years is he met all of those and so he earned his $60 billion. So I feel like, I mean, what would you do if you're the board in this situation out of the options that you could take?

• 23:40Scott Galloway?

  I think what you're suggesting is probably where they end up. And that is they give him some crazy, over the top options award that is, has very aggressive hurdle rates. And say, look, you can now be worth a half a trillion dollars and go buy, you know, go buy the BBC and, you know, Russia Today if you want. But we're going to put a big, big hurdles on it. I don't think a different class of stock is the way to go. But when you look at the margin compression here, when you look at how many people are coming for, for Tesla, whether it's Hyundai or that Chinese manufacturer, I forget who it is. I just think this guy is a few, you know, bad quarters away from all of a sudden this board finding its backbone.

• 24:34Ed Elson?

  The banks kicked off fourth quarter earnings season and JP Morgan once again reigned supreme. For 2023, the company had the most profitable year in banking history with net income of about $50 billion. Meanwhile, Morgan Stanley's quarterly profit fell 32% compared to a year earlier. And alongside Goldman Sachs, it reported its lowest annual profit in four years. Over at Citigroup, things appeared even worse. The company reported a net loss of $1.8 billion, down from a $2.5 billion profit the previous year. And it also announced 20,000 job cuts. Scott, mixed bag here. What do you make of these earnings?

• 25:11Scott Galloway?

  I mean, it's just amazing. Usually these banks kind of move in sympathy with each other. JP Morgan has registered profits, the likes of which we've never seen before in the banking industry. And I think it's it's better to be lucky than good, although they're both here. And that is as interest rates have spiked. If you if interest rates are 2%, yeah, that means you're paying people. You know, you're paying people 1% for their deposits and you're loaning it out at two and a quarter. That's a spread of 125 bips. When all of a sudden you can get 8% on a mortgage and you're paying people 5%, your spread is 300 bips. So for no real reason, your, you know, your margins or your gross margins are up 150%.

• 25:56Scott Galloway?

  So a lot of that is just the incredible earnings power or incremental margin they're getting on their deposits. In addition, because JP Morgan is so big and so bulletproof and so well-connected. When I think it was First Republic was going out of business, they got to pick it up. Basically, they got to pick up, I think, a quarter of a trillion dollars in deposits for free and then start earning their 200 bips. They picked up a massive amount of deposits just in time for the spread and the money they were making on those deposits to explode. So they have done, you know, incredible. Their shares last year were up 27%, which is really impressive when you consider that the NASDAQ Bank Index was down 5%.

• 26:40Scott Galloway?

  And then Goldman looks like things are getting better there. I think M and A volume is picking up. They have a great wealth management business. Their asset management business is much more consistent and the market likes that more. Their revenues increased 23% year on year and their asset management group. You know, they're executing and their profits increased 51% year on year, blowing away analysts' expectations. Citigroup or Citi, I would imagine that Jane Fraser is not long for this world.

• 27:09Scott Galloway?

  A $2 billion loss in the face of other folks doing really well. And Morgan Stanley fell short of expectations, but they're still making money. This was, I think this was probably a kitchen sink quarter. I would, I would say in that is sometimes the CEO takes all the charges, discloses all the bad shit, takes the write down because it's his first, I think it was his first quarter as the news, I don't know if it was first quarter, but he's got, he's in a, he's in a honeymoon period. So he wants, what he wants to do is kind of say, oh my God, I didn't realize how bad this was and blame the previous CEO and get it all out of the way.

• 27:46Ed Elson?

  Ted Pick, you're talking, the new Morgan Stanley.

• 27:48Scott Galloway?

  The new Morgan Stanley CEO. And set it up, you know, take all the bad charges, et cetera, and set her up, set it up for success.

• 27:54Ed Elson?

  Yeah, I think the, the kitchen sink point, it was almost like a kitchen sink for every bank this quarter because, I mean, there was no consistency in the profits. Like JP Morgan's quarterly profit was down 15%. Morgan Stanley down 32%. And then Citigroup, yeah, has this $2 billion net loss, which is just crazy. But they all had these non-recurring charges, as you say, the kitchen sink. For example, the main one is that they all had to pay the FDIC fee because of the Silicon Valley Bank collapse. And as we know, if you're a big bank or what they call a systemically important bank, that's more than $5 billion in deposits, then you have an obligation to cover the depositors if another bank goes down, which is what happened.

• 28:38Ed Elson?

  So Citi paid one and a half billion, JP Morgan paid three billion, and then you put all the banks together and they all paid to the FDIC just this quarter, $10 billion. In the case of Citi, there were also some really like niche one-off charges. There's this one and a half billion dollar expense that Citi calls the Argentina Russia transfer risk. And basically what it is, is For one, Argentina has devalued its currency by 50%. We discussed that on a previous episode. They're talking about getting rid of the central bank. They have this new populist leader in charge. And then over in Russia, they're fighting a war in Ukraine and they're being led by a murderous autocrat.

• 29:20Ed Elson?

  And the ruble is down around 30% in the past year. So basically, Citibank's concern is that they have all these assets in these two countries, and they might not be able to get the money out when they need it. So what they've decided to do is put aside $1.5 billion in case things get really bad. And it'll almost act, in my view, as like a rainy day fund. It's like an insurance fund. Now, the shitty thing for them is that that now shows up as an expense on the income statement. So if you were to just look at the bottom line here, you'd think Citi was fucked. I mean, $2 billion net loss versus a $2.5 billion profit last year. It's insane. But in reality, if you look at the top line, if you look at the revenue, things are actually fine.

• 30:04Ed Elson?

  The quarterly revenue is a little down, but it's stable. The net interest income is up, as you say, because the interest rates have risen. And then their annual revenue is also up. So the big picture is actually pretty good. In fact, we often think that the bottom line, the profit, is the number that tells you the full story. But sometimes, in rare cases, that's actually not true. And in this case, the truer, more accurate number that illustrates what's really happening here is the top line. It's the revenue. And in each of the bank's case, it's generally fine. JP Morgan up 12%, they're crushing it. Morgan Stanley's up 1%, Goldman Sachs is up 7%, Citi is up around 2%.

• 30:44Ed Elson?

  So I feel like the main story here is like, things are generally fine in the banking industry.

• 30:52Scott Galloway?

  First off, a lot of people say earnings are a shitty metric because they can be manipulated. And what a lot of CEOs of big companies do is when they feel, for whatever reason, either they're new, or they just want to get it out there, or they want to smooth out their earnings, they create reserve funds that takes down profits. And then they will perhaps decide, oh, the banking crisis in Argentina isn't as bad as we thought. We're going to take that reserve fund down, that special reserve fund down, or bad debt fund down, and juice up our profits. And what CEOs are often accused of is managing... Earnings based on what's happening with them personally, or their compensation, or how they want to communicate to the market, or usually they do it to smooth things.

• 31:35Scott Galloway?

  So American Express was famous for this, that in really good quarters, they would create reserves for bad debt or something like that. And then in bad quarters, they would tap into those reserves and say, what do you know, our, our bad charges aren't as much as we thought. So they put it back into the bottom line. They kind of manage earnings, if you will. And that's what it sounds like here is that they were managing that earnings to your, to your point, and it's a good one. Earnings don't tell the story here. And that's the lesson. You want to look at gross margins. You want to look at growth. You want to look at top line growth, all of those things to get a full picture because earnings are a really difficult way to get a read on a company because the CEO can decide

• 32:14Scott Galloway?

  on the board to take big charges or to reincorporate reserve funds or whatever it might be. There's all sorts of tricks and things you can do to fool around with earnings.

• 32:25Ed Elson?

  Yeah. And on the point of good corporate communication, I thought what City did, I'm actually going to take the other side of Jane Fraser's in trouble. I think they've actually done really well here. And what the CFO did, this guy Mark Mason, is two days before the earnings release, he put out this blog post basically telling everyone, this is what we're going to do. We're going to do this one and a half billion dollar transfer risk fund. We're going to also pay our FDIC fee. And then he had this, what I thought was a really good line at the bottom. He said, quote, "As you've heard me say before, we are a bank for all seasons. Our ability to digest these charges and take reserves against potential future challenges is a testament to the strength and stability of our firm and how we continue to weather all types of market environments." That was two days before earnings.

• 33:10Ed Elson?

  And then after this, what would appear to be awful earnings, the stock rose around 2%. So I think they've actually done a great job here.

• 33:18Scott Galloway?

  Oh my God, the student becomes the teacher.

• 33:21Ed Elson?

  Boom.

• 33:22Scott Galloway?

  I think you're right. I, I, I take it back. I withdraw the statement. I think Jane is, is doing a great job.

• 33:30Ed Elson?

  We'll be right back after the break with a look at the do's and don'ts of firing people.

• 33:44Speaker 00

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• 33:53Speaker 01

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• 35:55Ed Elson?

  We're back with Prof G Markets. A tech worker was fired last week. Not exactly breaking news. But while on her 50-minute call with Cloudflare's HR reps, that worker, Brittany Peach is her name, recorded the conversation and posted it to TikTok, where it quickly went viral.

• 36:11Speaker 05

  We have an important meeting today. We've finished our evaluations of 2023 performance. This is where you have not met Cloudflare's expectations for performance. We've decided to partner with you.

• 36:23Speaker 06

  Yeah, I'm gonna stop right there.

• 36:25Speaker 05

  Sure.

• 36:26Speaker 06

  So I started August 25th. I've been on a three-month ramp. And then it was three weeks of December, and then a week of Christmas, and then here we are. Every single 101 I've had with my manager, every conversation I've had with him, he has been giving me nothing but, "I am doing a great job, I have had great activity, I have really great meetings." So I disagree that my performance hasn't been, I haven't met performance expectations.

• 36:58Speaker 05

  I hear you.

• 36:59Speaker 06

  Also, why are you doing this and not my manager? Not, you know, we've never met, so this seems a little odd that my manager has no idea that this has been happening, and the director has no idea that this has been happening. So I'm just definitely confused and, yeah, I would love like an explanation that makes sense.

• 37:20Speaker 05

  We had a little color, context to that. So just for clarification, you are not being singled out in this. Your peers are also being collectively assessed on performance. This is a collective calibration for Cloudflare. So I just wanted to clarify that piece. I won't be able to add any kind of specifics on the numbers or...

• 37:38Speaker 06

  Wait, yeah, no, can you explain for me why Brittany Peach is getting let go?

• 37:43Speaker 05

  The I won't be able to go into specifics for numbers.

• 37:47Speaker 06

  Wait, why, though? I just started. I've been working extremely hard. I really need an answer and an explanation as to why Brittany Peach is getting let go, not why Cloudflare decided to hire too many people than are now actually realizing that they can't afford this many people and they're letting that go. If that's the real answer, I would rather just you tell me that instead of making up some bullshit and telling me that right before I lose my job from someone that I've never met before, if you can respect that.

• 38:15Speaker 07

  Yeah, I can totally respect that. And I don't think Dom or myself today is going to give you any clarity or answers. It's going to meet the expectations that you're communicating to us, Brittany. So I can't speak to.

• 38:30Speaker 06

  So am I getting let go for no reason? If you guys can't give me a reason.

• 38:36Speaker 07

  I'm happy to follow up with you separately to give you the data that was calibrated.

• 38:42Ed Elson?

  Now, Scott, this story is a bit out of the box from what we usually cover, but you often talk about talent retention as a key strength of successful companies. The flip side of that, though, is, of course, layoffs. So as someone who's fired people, what would you say went right or wrong in this interaction?

• 38:58Scott Galloway?

  Well, first of all, I'd just like to point out I've hired a lot more people than I've fired, but I've probably hired, I don't know.

• 39:06Scott Galloway?

  I would bet that I have personally hired eight hundred to a thousand people and personally fired fifty to a hundred. And let me just say, one of the reasons I don't want to start another company is probably half the time I was planning to let someone go. And I feel like if you've hired them, you have a responsibility, and the CEO of a small company, you have a responsibility to be in the room when they're let go, is it just is awful. I would always like come up with reasons to delay it a day. It's just awful. You're rocking their world, no matter what you say. It just. It's just not fun. It's something I really don't miss about managing people or a small company. Okay, so generally speaking, what you want to do is you want to get right to the point.

• 39:50Scott Galloway?

  You're being let go. And rather, what I usually do is rather, you know, you can kind of outline why in bullet points, but say, rather than having a discussion, which we may or may not agree on about the why, I want to immediately get to what we're going to do for you. And what I've always tried to do is fire sooner than you might think, you know, slow to hire, quick to fire. That way you can be as generous as possible. What I like to do in a small company, you can do, you can do this, and it's probably not possible at a place like CloudFlare, is I would say to people, it's not working out. Stay here as long as you need until you get another job. And let's talk again in a month or two months and tell me how your job search is going and let me know how I can be helpful. That's the way I like to let go of people.

• 40:32Scott Galloway?

  And you can do that in a small company that's profitable, and almost all of my companies have been those two things. In this instance, the fissure, if you will, or the inconsistency is they say she's being laid off for performance reasons. And yet they didn't bring any data around what those performance expectations were that she wasn't meeting. So she had absolutely every right to say, wait, you're letting me go for performance? I've been here three months. So why exactly am I being let go? And they immediately moved to, well, this isn't, you have not been singled out. Well, okay, that sounds like a layoff. And you didn't say it was a layoff. You said it was performance reasons. And finally, more than anything,

• 41:12Scott Galloway?

  I think you just want to be human. I mean, they use language in there, like, they just use weird language that they sound like lawyers built in a factory of lesser lawyers. They did know the situation. Also, if you bring someone into a meeting where you're letting them go and you're firing them for performance, and they're surprised, it means you have fucked up.

• 41:34Scott Galloway?

  You absolutely, when someone is not performing, you have an obligation to tell them they're not performing and say to them, this is what you need to do, or you risk being let go.

• 41:45Ed Elson?

  Well, CloudFlare representative, after this whole thing blew up, they said, quote, "CloudFlare did not conduct layoffs and is not engaged in a reduction of force." So they're basically doubling down on, she was fired for cause, that is, for failing to meet performance metrics. I feel like that's also a really important distinction, because if you're fired for cause, you don't get severance. So she doesn't have to get paid.

• 42:10Scott Galloway?

  Well, hold on, there's a difference. There's a difference. Being fired for cause, you basically have to commit a crime. Even if you're fired for not meeting performance, firing for cause, the hurdle is really high. I mean, it is very difficult to fire someone for cause. She can be let go for performance, but even if that's the case, she would be entirely entitled, and most companies, especially a company like CloudFlare, would have an obligation and a standard practice would pay her severance. And also, just generally, you don't, CloudFlare is a big, important company that wants to recruit people. The best investment you can make is, or one of the best investments you can make,

• 42:55Scott Galloway?

  generally speaking, you want people to feel good about their experience, even when it didn't work out. This is probably the single, that video is probably the single most brand damaging thing that has happened to CloudFlare in a long time. Because if you're a young person, A, all you do is watch TikTok, because that's all you do. That's what I know, Ed. And two, you just don't have a great impression of going to work for CloudFlare right now. And then when they start hiring again, I bet it's going to be, I bet it's going to be a little bit harder. And the investment of paying people a little bit more, so they feel like, yeah, you know, they fired me unfairly, but I got to give them this. They were generous with me. You gotta give people that, especially if you're a company like CloudFlare,

• 43:40Scott Galloway?

  and you have that kind of money. You don't go wrong being a little, you know, being a little bit more generous when people are on their way out the door, such that, because every one of these people is either a brand ambassador or a brand destroyer out in the marketplace. So, look, there's a lot to learn here, and it's mostly a learning around what not to do.

• 44:04Ed Elson?

  Let's take a look at the week ahead. We'll see earnings from Microsoft, Netflix, Tesla, Visa and American Express. We'll also see fourth quarter GDP data and the personal consumption expenditures index for December. Do you have any predictions for us?

• 44:19Scott Galloway?

  So just as BlackRock has lost a lot of business and taken a lot of grief for its impact investing and focus on ESG, Bill Ackman is kind of becoming the face of the kind of anti-ESG and I think that he's going to lose some investors and come under some pressure. The first quarter that his fund underperforms the marketplace, I think people are going to accuse him of having taken his eye off the ball. And I think a lot of investors who actually appreciate impact investment and DI initiatives are pissed off at the way he's handled this are going to very loudly and publicly withdraw or redeem from his fund. I think, I think we're going to start to hear from his investors about his activities. This episode was produced by Claire Miller and engineered by Benjamin Spencer.

• 45:04Scott Galloway?

  Our executive producers are Jason Stavers and Catherine Dillon. Neil Severio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Box Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday.

• 45:57Speaker 08

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• 46:28Speaker 09

  I'm Glenn Washington, host of Snap Judgment from KQED. Every week, Snap drops you inside someone's biggest decision. The kind of decision you can only make once. With everything on the line, what do you believe? What do you want? And what would you risk to get it? Find out. Tap to listen now to Snap Judgment from KQED on Spotify.