Facebook (Meta) Lesson 1: Corporate Governance - The What, Why and What now?

This has not been a good year for Facebook, as its stock price has plummeted, and its earnings report from last week precipitated a new round of selling and finger-pointing. In this session, I start by putting the news in the most recent earnings report in perspective, but use the reaction to the report to look at bigger issues that affect tech companies. Specifically, I focus on corporate governance, and argue that much of the legislation, research and regulation in the last two decades has focused on the details of board composition and proxy voting minutiae, while giving shareholders the power to change management at the companies that they invest in. I argue that change is needed because managers can be mismatched to the companies they run, use the corporate life cycle to illustrate why these mismatches occur and explain why are more likely to happen at tech companies, with their compressed life cycles. Ironically, these are also the companies where we have acquiesced to being second-class citizens, in terms of voting rights, making change less likely in companies where it is needed the most.
Slides (if download does not work, try a different browser): www.stern.nyu.edu/~adamodar/p...
Blog Post: aswathdamodaran.blogspot.com/...

[@SamWhitlock]

I still cannot believe this amazing content is available for free. I've learned so much so quickly thanks to your clear explanations!

[@ramyasri6093]

So true

[@PedalToTheMetal61888]

...CAN''T BELIEVE HE SPEAK BETTER ENGLISH THAN ME

[@AlessandroOrlandi83]

This video is really interesting and clear even for not strictly business people. Thank you Professor!

[@carlosaranda5254]

Extraordinary lecture. I appreciate you taking the time to make it.

[@phoenixrising164]

its always a treat to listen to Professor Aswath. find myself lucky to have access to content like this ....

[@danshmilovich6943]

Dear Professor, you're a legend. I follow all your posts and have read your books. I wish I could be able to move to NY and be your student! Thank you for everything you do!

[@dolevmazker736]

Wow, this session is with some crazy insight to META. Thanks and hope for more

[@scienceoffinance1778]

I love how you explain Stakeholder vs Shareholder

[@JessicaQChen-lv5uk]

Thank you, Professor Damodaran! You always makes complicated issues crystal clear.

[@AH2andBeyond]

So true!

[@gorandamchevski]

Besides managers capturing control (and us investors letting them) there seems to be an emerging class of people running index funds that have increasing power over companies. (If I'm not mistaken) These Vanguards and Blackrocks are using shareholder money to push their own vision of how companies should be run via nominating board seats instead of letting investors decide. Thank you for the great video.

[@tempioxavo]

Always happend for what I know there is always been something called "shareholder card" to be played in the board, from Graham's books already mentioned

[@cykablyat1466]

It's been the case for a long time that institutional investors or index funds have always been terrible shareholders to invest alongside with. They generally want to run everything on autopilot, they usually vote whatever the board recommends and outside of that when they do make decisions it's to push proposals or for board seats for reasons that have nothing to do with the business but rather just a policy decision for how they want to run all their funds at the asset management company's level. I don't really invest in many large companies anymore for various reasons but one of the big ones is that the relationship between the retail investors or the active investors and the CEO/Board/etc has deteriorated overtime. You're basically investing in a business with a bunch of institutions that don't care what's happening with their fund's 0.5% portfolio allocation in your stock, the CEO doesn't have a ton of shares/doesn't have meaningful skin in the game or incentive to create long term value and the boards are becoming less of industry experts/possibly managers in the business and more of random people who've never worked in the industry before.

[@fabiosimeone05]

Thank you from Italy! ♥♥♥ Please never stop making videos

[@farbodba]

Extremely informative session! Thank you Dr. Damodaran! Looking forward to the future lessons

[@alexandrertp]

Amazing content Professor. Thank you for taking the time. Greetings from Brazil

[@AH2andBeyond]

BEAUTIFUL Professor Damodaran! Governance…as a forecasting mechanism.

[@yuvraj94]

I wish I could go back to school and study under professor. Just so much amazing knowledge!

[@pearluser4833]

Thank you very much for this highly interesting and pedagogical lecture. I agree with your conclusion. But I would add that there is also the fourth option that the majority shareholder(s)/managers can adapt and either become a different kind of managers or collaborate with such a different kind of managers as in the case of Apple. I guess the question in the case of FB is how far must its valuation go down before we see the right change. And this depends on the current owner's conviction that (i) he has the right vision for the future of the company and (ii) he knows how to execute a pivot at such a large scale. (i) may be right, but (ii) is the most challenging to assume.

[@rsanden]

Wow! Incredible and crystal-clear presentation.

[@Vladimirunique]

Thank you dear Aswath. Your videos are very useful. I still remember how you easily answered me when I emailed you asking to look into my investment thesis for my MBA class in 2018.

[@herokorai8346]

Thank you so much Professor! I enjoyed the way you present and appreciate your insights

[@ramyasri6093]

The knowledge you share is understandable even to people of non finance background. The small world "Thanks" is not at all sufficient professor

[@chandrannatarajan6616]

Thank you professor 🙏. Be blessed always 🙏

[@banksy2870]

That was an excellent analysis. Thank you for sharing your knowledge and wisdom with us.

[@neerajudasi9296]

Thank You Sir for such an insightful session!🙌

[@stanleyphilipose6269]

Can you revalue meta stock ?

[@wm6549]

Patience

[@randomsitisee7113]

No i don’t think he will

[@ps2050]

Great insights ! esp on leases being treated as debt. I had always considered it to be the same since we are contractually obligated to pay rents every mth. unless there is an exit clause which still could be considered like a bond not held till maturity and redeemed at the rate = exit clause amt.

[@Kraktur]

Thank you so much for this lesson, Professor

[@user-tg6zt4yx2b]

I just valued Meta using the method you teach Dr. Damodaran! Thank you!

[@headway5559]

How do you feel about meta after doing that?

[@user-tg6zt4yx2b]

@@headway5559 Based on my estimates and story, it seems like Meta is very undervalued. However, the professor does bring up the point that leadership resembles an autocracy more than a democracy.

[@SNAPE214]

amazing session, please more on corporate governance and ESG

[@bongumusakowa5452]

Thank you Sir for sharing your thoughts

[@gauravamin4048]

Hello sir, amazing lecture as usual. Can you please make video on the twitter transition, would love to hear your thoughts on it. Wishing you the best and your video have always been insightful. Thank you for your time and effort!

[@tomcat8662]

Thank you for this. They never taught this when I was in business school.

[@raosiddharth4726]

You are such a lengend, i wish to study at the University where you teach one day hopefully.

[@Motivation2Invest]

Corporate Governance will always be an issue, a way to handicap it is by investing into companies where insiders own a large portion of shares, this helps to align interests (although not perfect).

[@Motivation2Invest]

Insightful as always, I imagine a rise (rebirth) of Activist Investing in order to help regain the rights to control certain organizations. We are already seeing this with Musk and Twitter.

[@Michael_NV]

I just became smarter than I was an hour ago. Thank you very much for this lecture.

[@jdlk3345]

excellent lecture

[@floyd9223]

fantastic as usual. thank you

[@8rsosa]

Very helpful thank you.

[@sklux6147]

Great. Refreshing. 👍🏻

[@cantmakeaname11]

Amazing. Thank you.

[@connorxiaoyang878]

very great lecture

[@mli3525]

Thank you so much

[@AK-qq4tg]

Thank you Professor

[@dmytrosoroka7335]

Thanks from Ukraine! Could you, please, explain, why in the slide named "Shareholders vs. Stockholders" ( 17:15) you mention "stakeholders" as those who should be privileged in regard to their interest, whom are they refers to?

[@jigneshmathur8527]

Can you please explain your question or present it in a better way I will try my best to answer

[@byongzun5]

Thanks for your great presentation~!!

[@hyunjinpark5086]

Blessed is the man who does not walk in the counsel of the Zucked!

[@sanc9808]

Thank you sir

[@jebbysphiri6875]

GREAT UTILIZATION OF MY DATA,THANKS FOR SHARING

[@kulknira1]

Amazing video. Lot of learnings

[@fredscott9013]

This is a must watch for anyone investing in stocks. I'd like to see how it would be possible to identify what kind of management is currently running a particular company? For example, is Google management matched with its current corporate age? Are they operators, visionaries, liquidators, etc?

[@quiet4979]

What is your guess?

[@sssandhu78]

This man is a genius.

[@vaporwaveplus6289]

Thank you professor!

[@johndoe1646]

Is it possible for the share structure to change?

[@peterlovisek9210]

Fantastic insights!

[@BlackieMatt98]

Super captivating speaker. Subscribed

[@andytolle4352]

Thank you

[@Sir_Sway]

Great points!

[@abrahamgeorge5407]

Would like to know your comments on big (not too large) owner managed business having independent directors considering the issues they face W. R. T having outsiders on board

[@eladzur1000]

Thank you ,Professor, it was a very good session. The main question is what lesson(s) can we (retail investors) learn and use in the future ?

[@alexburlaka838]

Great lesson, great value! Greeting from Ukraine!)

[@deveshbabbar3941]

Informative

[@nitinv8]

Amazing as usual. Get to learn so much about business from you Professor!

[@ZAGIDI]

Great presentation 🥷🏾👍🏿

[@1percentRule]

Full of knowledge video. One day I am going to take your class. Inshallah

[@ThatGuy-123]

Great video!

[@yuanliu200]

You video is full of wisdom!

[@abhipatil4844]

Good one

[@metinmogensen1283]

I think you jumped abit quickly over the agent-principal argument. But all in all a good video with valid points.

[@kumarapillay3122]

Hi Sir, as others have asked can u revalue Meta stock?

[@manubhatt3]

Hail The Great Madrasi Valuation Anna!!!

[@profkg6613]

"Innovators Dilemma "comes to mind.

[@RaDeIRhd]

Very interesting lesson about Corporate Governance. Thank you!

[@josephbyron2813]

Do you have a video going in depth on ESG?

[@rexiioper6920]

he has at least two on this channel

[@nishantparhar4213]

Fantastic video as always, very informative

[@samiuzzamanaabir6783]

Whatte session!!

[@shreenidhinayak2627]

What’s going on is that ppl saw a behavioural change in social media usage. First facebook app which was a flagship app and a cash machine for Facebook. Then the company saw a shift when messaging shifted from SMS to WhatsApp and that created ppl to use fb comparatively lesser than before. So they acquired it with massive multibillion dollar deal. Now Facebook became a monopoly in social media usage. After that Instagram came in and Facebook users migrated from fb to insta eventually fb became an overcrowded app and insta was the new cool so Facebook acquired insta. Now suddenly Facebook realised that insta will face the same fate as their flagship fb app. Because insta is also overcrowded. So meta is now that next migration topic but zuck might be wrong cuz ppl r still not willing to move from phones to VR headset.

[@Paulie44]

Very useful information, thank you. I’m a long term Facebook shareholder since the Cambridge Analytica scandal and have seen all my gains wiped out…and some!

[@abdi348]

We all now who your referring to when you bit your tongue and said "somebody with no vision" i.e. McKinsey 29:41 😂😂😂

[@31088489]

holy shit, this lecture is a complete gold in the Internet!!! mind fuckin blown!!

[@Aj_98]

Any advice to learn corporate finance for beginners

[@tejashreeshinde7403]

You can go the channel, click on Playlist section. You will be able to find the series of lectures onCorporate finance & Valuation.

[@cookiejar01]

I would say Blackberry went out of business because they weren't visionary enough. Same for Nokia, they were running the shop like and old economy business. You can't do that in tech because the next big thing will come along. The moment you stop innovating, you go out of business. That's the difficulty for a mature tech business - you need to run the shop as a big business and at the same time keep a start up like mentality and innovate. I think that's only possible under founder CEOs like Steve Jobs, Jeff Bezos and yes, Mark Zuckerberg. The moment a tech business is run for the shareholders, it's pretty much a dying business.

[@rexiioper6920]

Do you have any examples of tech businesses that have successfully innovated over long periods of time? Apple maybe closest but the value generating product pipeline has been incremental since iPad. Amzn possibly too but AWS should be a commodity low margin business before long.

[@thirukaruna7469]

Thank you Sir.! Very insightful. Hoping Zuckerberg to change from a Visionary to a much more realist.!

[@ctrs4791]

Someone please explain to me why the market is valuing stocks the way it is for example why is KO trading at a 26 P/E with 23.5 percent net profit margin and why is GOOGLE trading at 17 P/E with a net profit margin of 23.7 percent?

[@tastypymp1287]

Because valuations are based on forecasted earnings....

[@danielquevedo764]

29:44 - nice.

[@matt79de]

Ugh... a very painful truth... Odd, how we more often than not overlook the obvious... Thanks for the reminder, Professor.

[@incyphe]

thank you so much for sharing your valuable insight. this was so informative. Is the only person who can change the dual class voting structure Zuckerberg himself? Will his stepping down be enough for share price to recover, or do you think the market is looking for change in the voting structure?

[@togoni]

So what about FB's future value?

[@rimservices]

Unlike dictatorship, you can much easier vote with your feet in the stock market, so no great tragedy. Consistency demands though for this to be pointed out not only for the losing team but for the winners as well, so I hope in the next takes on Tesla the issue of dual-class ownership will be stongly stressed at last.

[@rexiioper6920]

but so far investors have not demanded big discounts for shares with poor voting rights

[@anurajpandey9898]

Men knows about 2nd order of thinking, Legend talks about10th order of thinking. 🙏

[@affansiddhiqui3739]

*People who are complaining about the privacy of the facebook are complaining on facebook pages* This had me rolling 😂

[@chromeyoutube505]

Aswath must be good at roasting.

[@YouBetterThink]

So in summary: Zuck is a dictator that won't leave

[@VilleHyytiainenInvesting]

I don't think special voting shares are a problem. Just don't invest in companies with founders controlling them that you don't trust. I'll much rather give voting control to great founder than BlackRock, Vanguard etc.

[@Blazzde]

It's about the incentives. Invest managers have incentives aligned with investors. BlackRock cares about their AUM headline and the percentages it generates. So they work to maximise shareholder wealth, more-or-less. Why should Zuckerberg care whether he's worth $125bil or $35bil? Both those amounts are more money than anyone needs. You can expect him instead to care about the illusion of success (and so obviously a 75% drop in META's market cap isn't a great look) but he also cares that his decisions subtlety influence what goes into the eyes and ears of billions of people every day. I expect him to abuse his position like the media moguls of the 20th century did, to put their finger on the political scales and use that influence to mix in high circles for the sake of entertainment and enjoyment of power. Not something wholly aligned with shareholder wealth maximisation.

[@VilleHyytiainenInvesting]

@@Blazzde Blackrock and Vanguard dominates the market and the portfolio managers just vote for clients without having any own funds in it. It literally makes no difference if some company in their passive S&P500 index fund tracker under- or overperforms. I don't like that these institutions are getting so political while having massive holdings in all major companies of their clients money without being invested by themselves. These are not like hedge funds who try to beat the market. These are institutions creating passive index fund instruments. Huge difference. Your second point was something about Zuck and my point was that people should not invest Facebook unless they trust Zuck. I wouldn't.

[@Blazzde]

​@@VilleHyytiainenInvesting Well I agree passive investing will be the death of accountability if it gets big enough. For now the big investment companies' votes do matter because they have to convince especially other institutional investors that they'll look after their investment or those investors will take their money elsewhere. Although they're not very proactive at fighting for change they do often back credible 3rd party activist investors, and even the theoretical possibility of change is enough to keep most managers in some kind of check. Zuckerberg (or any corporate dictator who does manage to trick you into trusting them) has no sword hanging over them. They can do whatever want. Personally I put my trust in incentives, not in people.

[@Blazzde]

Putting your trust in an individual alone to look after your investment is the hero worshipping problem the prof refers to. How many times have you come across someone who talks a good talk, seems really smart and credible and trustworthy and then only much later realised you were wrong about them?

[@VilleHyytiainenInvesting]

@@Blazzde I actually can't remember. Maybe it's due to my judgement maybe just young age. I usually judge by actions and incentives. Anyway the point is that nobody is forced to invest in Zuck and there can be leaders people would be willing to hand the control. I'm not arguing against your point though, if you though you can trust Zuck and invested in Facebook well now you are on his mercy which sucks.

[@mshariefff]

Tech companies age in dog years got me wheezing😭

[@jc_777]

Damodaran, is he God?

[@yellowfish555]

if the life cycle of a tech company is shorter, doesn't that mean that it should have a lower valuation?

[@IIIIIawesIIIII]

Assuming constant free cashflow and dividend payout, ceteris paribus yes. But you see how that doesn't need to be the case. Compare it to a gold mine. Its valuation is not proportional to its lifetime, it's proportional to the resource value less costs that can be extracted from it. Assuming a positive discount factor as is usual, a shorter lifetime (due to faster extraction and hence earlier cashflows) actually means a higher valuation. This valuation will however drop very quickly over time. A farm on the other hand may be able to extract value from its resources indefinitely. You may think it'd approach infinity. The positive discount factor makes its valuation much lower though. Facebook was a goldmine, not a farm.

[@Frumold]

@@IIIIIawesIIIII great explanation :)

[@tastypymp1287]

Put simply, valuations usual spread across 10 years into the future. In that 10 year period, it can make a lot of money, fast. It's those earnings and subsequent cash flow across that period that's valued.

[@yellowfish555]

​@@tastypymp1287 yes but then a terminal value is determined either by using a multiple or a terminal growth rate. so the question is is that terminal value should be lower.

[@tastypymp1287]

@yellowfish555 That would depend on the duration of the forecast and when it was made. The terminal rate could still be assumed to be healthy at the point the forecast is made.

[@Tential1]

It's Zuckerbergs hubris that keeps him as ceo of Facebook. By corporate structure, he is still the majority shareholder (or enough anyway, haven't checked with the recent buybacks) he could step down as ceo work on something he's actually good at, and let someone else be the vision and face of the company. He can fire the CEO... It's not a big deal. The fact he's still ceo when he has the charisma of a potato is irritating. So many people refuse to utilize the corporate structure to its fullest extent.. There's still so much innovation left to show the world on running a corporation from a purely structural standpoint. Edit, I see the breakdown now, I think at some point he had less than 50% but I could be wrong. This is why I was suspect of the stock tanking and 100%+ of fcf being spent on buybacks when fb never did buybacks this heavily before.

[@borissegar1664]

Please disclose if you hold Facebook next time.

[@rihardsgr]

So, in short. Meta is a mature, stable company, but its CEO acts like it is a startup. Are you saying that Zuck is unfit to lead Meta as of now?

[@bhuvanajagarapu7977]

SEC is issue .

[@AsifAli-tl6fu]

Not only Facebook but also Alibaba