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Transcript: Steven Galbraith – In the Boardroom (EP.48) Published Date: April 16, 2018 Length: 55 min Web page: capitalallocatorspodcast.com/galbraith2 One common refrain across my conversations has been the importance and subtleties of effective governance in making optimal investment decisions. Alongside Steve’s incredible career as an analyst, strategist, portfolio manager, and entrepreneur in the asset management business, he has served on as many Boards as anyone I know. I imagine many of you have heard Steve’s story, but if not, you may want to have a listen to the very first episode of Capital Allocators before diving in here. Our conversation starts with an update on Steve’s personal investment in the Narragansett Beer Company and moves into a practical discussion inside the Board rooms of each of his current seats that range across a university, a large family office, a public company, a government agency, and two early stage fintech companies. We touch on time allocation, governance structure, Board composition, adding value, the politics of Boards, and the motivation of Board members. We also get an update on Steve’s family office, that he’s managing alongside his wife Lucy, a seasoned distressed debt investor, and we close with our brief, contrary outlooks on the baseball season. Topics: Boards, Governance, Board composition, Board politics, Family Office Edited by: Griffin McGee

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Show Notes 2:45 – Update on Narragansett Brewery 2:53 – How Passion Investors Helped Revive Narragansett Beer 4:28 – Narragansett in the White House 5:19 – With all of the boards that he serves on, how does he manage his time 7:34 – How much time do these boards assume Steven is investing in them 9:32 – Highest functioning board 11:46 – Maintaining stability between the board and investment team 16:29 – What Warren Buffet had to say about the Tufts endowment 17:45 – What are the board dynamics in a family office 22:22 – Overview of for-profit boards 26:12 – Is the familial relationships of board members another way an investment committee could construct a board 26:56– Could a university or foundation create a board like this with close familial ties amongst members 28:46 – Optimal board structure of a foundation 29:57 – Steve’s time in government serving on a board 32:52 – Board of startups and early stage companies 35:02 – A look at Steve’s family office 37:20 – What do the analytics of financial companies look like 5-10 years from now 38:35 – Looking at the quality of analytics he currently gets from his outsourced team compared to larger firms he has worked with 39:37 – What is Steve seeing in the markets 40:42 – What is the most interesting idea that’s come across Steve’s plate in the past year 44:32 – Politics of boards and what drives them 48:36 – Closing Questions

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Ted Seides: A year ago, I sat down with my friend Steven Galbraith to record the first conversation of Capital Allocators. We had a great time, I thought I might be onto something, and I promptly lost the recording for the next two days. Eventually, I got the technology to work, recorded a few more, and went from there. It’s been a great journey and an incredibly fun time, and I’m eagerly looking forward to the next year.

One common refrain across my conversations has been the importance and subtleties of effective governance in making optimal investment decisions. Alongside Steve’s incredible career as an analyst, strategist, portfolio manager, and entrepreneur in the asset management business, he has served on as many Boards as anyone I know. I imagine many of you have heard Steve’s story, but if not, you may want to have a listen to the very first episode of Capital Allocators before diving in here.

Our conversation today starts with an update on Steve’s personal investment in the Narragansett Beer Company and moves into a practical discussion inside the Board rooms of each of his current seats that range across a university, a large family office, a public company, a government agency, and two early stage fintech companies. We touch on time allocation, governance structure, Board composition, adding value, the politics of Boards, and the motivation of Board members.

We also get an update on Steve’s family office, that he’s managing alongside his wife Lucy, a seasoned distressed debt investor, and we close with our brief, contrary outlooks on the baseball season.

Steve’s perspective and insights on the real world of Boards is second to none, and this conversation is as full of gems as our first one. Thank you so much for your interest over the last year and for spreading the word. Please enjoy my second conversation with Steve Galbraith.

Ted: 00:02:33 Steve, every time we've tried to talk the last couple months you've been in some version of what you referred to as boardroom hell. So I want to get to there, but I think the best place to start has to be an update on Narragansett Brewing. There was a Barron's article in September with you and Lucy in the mini cooper that's outside. Why don't you give an update on how the company's doing?

Steven: 00:02:59 First of all, the beer industry is brutally difficult as your listeners may know. You've basically got these monolithic guys like Budweiser, MillerCoors, who just beat the crap out of the independents and they're doing a great job. We're budgeted to have our first profitable year in 2018.

Ted: 00:03.17 Weren’t you budgeted to have the first profitable year last year?

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Steven: 00:03:19 Breakeven roughly and so now a big part of this is actually, ironically the Trump tax cuts because, believe it or not, Gansett was viewed as a major brewery under the old tax laws and so we had a huge excise tax that was actually ascribed to the company and that's going away.

We have our own brewery up in Pawtucket now, so that's an update since we last met, where we're brewing in the state of Rhode Island for the first time in I think like 25 years. We've got a new product called Fresh Catch coming out, which is going to be what Corona is too Mexican to seafood. So, touch wood, it’s going great.

Ted: 00:04:00 That's fantastic. And when you go and do like a piece like that for Barron's, is there a noticeable impact?

Steven: 00:04:06 It is well you get weird approaches out of the woodwork. So random people will say, “hey, do you need a marketing guy?” And you do get inbound approaches from potential buyers where you'll have private equity guys saying, “hey, this looks like, kind of interesting.” So yeah, it's not dissimilar to I imagine to your podcast where you'll just get these rando observations from people you've never heard of, kind of coming across the transom.

Ted: 00:04:30 And so somehow that led to Gansett being in the White House?

Steven: 00:04:32 I’m in the office and one day I get an email from Mark, Mark Hellendrung, who's a Brown guy who runs Gansett for us and there's a picture of Sean Spicer with the Hi Neighbor hat on. And yes, the White House actually had a day, I think it was about ‘Buy American’ and we were the beer representation. And it turns out Sean, his sister actually works for like the Beer Lobby of America or something, and they're both Rhode Islanders and so that was the Gansett connection.

Now the irony is Gansett is the primo hipster, kind of Williamsburg, Brooklyn beer and so for it to be in the White House was just dripping with irony. Yes. We've made the big time now

Ted: 00:05:24 I want to spend a lot of the time talking about boardrooms. And if I have, I may have the list wrong, but as far as I can tell you are currently on the Board of Trustees at Tufts, the Board of a large family office Said Holdings, the Board of Success Academy, Board of Directors of Narragansett Brewing, the Board of Pzena Investment Management, two fintech companies Equity Data Sciences and Lightkeeper, used to be on the Board of the Constitution Center in Philly, also did some time with Treasury and Office of Financial Research. How do you think about your time?

Steven: 00:06:00 Yeah, it's funny. So my partner and wife made a pointed observation to me last year, like how do you think about your time? And so I actually

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went through and kind of looked at the time spent on the different boards and it's considerable. I probably spent as much as a third of my business time on boards last year. Now there's an ebb and a flow to it Ted, so for instance with Tufts board asked me to do kind of a full diagnostic on our endowment at Tufts and so that ended up being, in fact, that's where we had our Omaha experience where you took me out to meet Warren and asked him about endowment management and so that was a flow, if you will, where there was an immense amount of time where I was spending hours on end meeting with industry folks and so on and so forth.

With Success Academy, we've been embarking on a private real estate effort. That's taken an immense amount of time. And then for other things like the Pzena Board that's been much more steady eddy where it's very predictable thing. It's actually not a huge amount of time, but it's done very, very efficiently and I get as much out of that is I give so each one will have its own kind of pace to it and what you'll find is in and around crises or in and around forks in the road for the organizations, that's when you really end up having a time sink. The other observation I'd have is different boards have wildly different degrees of efficacy and what you find is the ones that are most functional actually tend to rise in and around crises or transitions and the more dysfunctional ones tend to do the opposite, as you'd expect.

Ted: 00:07:39 How do the organizations view you and your time as a board member? I guess a better way of asking that is in a lot of these investment organizations, as a corollary, the Board comes in, there's a quarterly board meeting, maybe there's this set of materials set out. How much time do the organizations, that may be the Tufts Investment Committee in that direct example think that you're spending and paying attention to what is happening on a day to day basis?

Steven: 00:08:10 If I were to critique the board industry, now that it's an industry, but broadly the more thoughtful ones are acutely aware of it and then in fact almost map it out over a course of a year or even better before you join a board. With Tufts, they had a couple of things. Jim Stern had been the Chairman of the Board, unbelievably able thoughtful guy. He sat down with you and very explicitly said, this is what we expect your financial commitment to be. This is what we expect your emotional commitment to be. This is what we expect your time commitment to be. And so coming in, you had that checklist with him. You knew precisely what was expected of you. Whereas some other not for profit boards I’ve been involved with it's completely willy-nilly. They kind of come at you whenever they have a need and it feels almost like a tax. And what's interesting and then there's also…

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Ted: 00:09:04 Tax in a financial sense like they're coming at you because they need money?

Steven: 00:09:07 The money, but also in many ways the higher tax is your time. Like you get, if you're on a not for profit board, you get part of your functionality is writing checks, like that goes with the territory. But I think the more egregious tax can be where they set up meetings where it's a road to nowhere. Where the you'll just have either meetings or they'll ask you to go interview folks or do whatever without really giving enough thought to how much time it may take.

Ted: 00:09:37 If you were to pick among these babies, what's the highest functioning board? And how does it work?

Steven: 00:09:46 It has been Tufts, which is unusual for universities as you well know. Usually university boards are A) huge B) unwieldy and C) not always that functional. And with Tufts the thing that they've done particularly well is carving out people to have very specific value add for the organization. So my expertise happens to be finance, so I chaired the Administration and Finance Committee. I chair the Investment Committee. I do think I can add a lot of value in terms of thinking about okay Tufts, we raised a hundred-year bond, you know, how do you think about that as a financier?

Well I thought of it as quasi equity and if you can raise a hundred years at four percent, you damn well better do it. But that's the kind of stuff where it's very targeted. They really have a very clear idea and they're solving for that on the board. So we have academics on the board, we have philanthropists on the board, we have financiers on the board and it's been very, very well structured.

Ted: 00:10:50 In terms of number of people, it sounds like these are sub-committees, ow many people are on each sub-committee?

Steven: 00:10:57 So that's part of the calculus as well. So if you think about a large, anytime you have a board that size, you necessarily need sub committees because that's the only way you're going to move the ball down the field. One of the issues though, and this is one of the things I actually did is I took over Chair of the Investment Committee, we basically cut it in half.

Ted: 00:11:16 From what to what?

Steven: 00:11:17 It had probably been as close to, it had been almost 15 people and we're going to cut it down to about six or seven. And part of that everyone involved was super able, very accomplished, but what you'll find on a committee structure is large as bad. And mainly because what happens

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is people can feel like someone else will take care of it. There's not a sense of ownership. But if there are only four or five, six of you on the committee, there's nowhere to hide, right? And so it becomes far less easy to kind of say, “hey, he or she's the expert on real estate, I'll defer to them.”

Ted: 00:11:51 And one of the things we've seen on the particularly endowment investment committees the last couple of years is a lot of turnover of CIOs. And it's nobody, I don't know, nobody knows from the outside. Is that a reflection of some interim period of sub-optimal performance? You haven't had that at Tufts. Um, what are the dynamics that allow stability between the Board and the investment team?

Steven: 00:12:15 In large part it's the Administration's, and by that I mean the President and typically the Executive Vice President will typically be a Chief Operating Officer equivalent in a corporate context. Really having a very strong interest in the success and continuity of the endowment. What you tend to find, and I did a lot of this as part of my due diligence, is when you have a lack of connectivity there, you typically have turnover. Because there's not a true understanding of what's going on at the endowment level and oftentimes it's not unsurprising Ted, because oftentimes you'll have these institutions run by the classic liberal arts guy or gal. They'll view finance kind of as this weird secret sauce. What value can I add? And so they tend to suffer from benign neglect.

Ted: 00:13:06 And is that incumbent on the new CIO to make that connection?

Steven: 00:13:07 I would argue it's initially incumbent on the Committee Chair because they will have the history, the continuity. In many ways they can do the heavy lifting because the CIO really does need, in my view anyway, unbelievable support from the Committee Chair. And one of the interesting things at Tufts, just to use it, keep that in the focus, was we went from a President, Larry Bacow, who's now the president of Harvard, world-class Economist, very financially literate and Jim Stern who ran a private equity firm, Cypress, unbelievably well versed on finance to Tony Monaco who's a world-class geneticist and Peter Dolan who ran Bristol-Myers but had more of a marketing than a finance [background]. So if you think about that as an example, so Sally's the CIO, she went from a leadership group who knew precisely what the heck she did to one where it was completely Greek. And the risk would have been in that translation and in that change of leadership, does she fall through the cracks?

I would argue we had a little bit of that early on and that's where they kind of asked me to step up and hey, can you serve as the bridge here? And fortunately both Peter and Tony were and are very good listeners and they would carve out the time to spend with me and Sally to understand the importance.

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Ted: 00:14:33 And how does that translate through in those different regimes to the investment decision level?

Steven: 00:14:41 So that's to me all about communication. So let's step back. Again using Tufts as an example, very specifically, we as a Committee had a view that expected returns, forward looking not back, were looking obviously are low. We also had a view on what the Universities finances we're going to look like. We actually took our spend rate down, which is very unusual in higher education today and we're doing it in a gradated fashion over several years, but we're taking it down to 3.5% to 4.5% from 4% to 5%.

Ted: 00:15:15 And what percentage of the University budget is coming from the endowment?

Steven: 00:15:17 It’s about 15%. So it's much lower than a Yale or Harvard. And so in theory we could A) take higher risk because we're not as big a part of this, you know, the, the annual budget. But then you also have to look at the finances of the institution. If you look at Harvard for instance, the Business School is a very high margin school. Law Schools are very high margin schools, Law and Diplomacy at Tufts or the Med School aren't high margin schools. So all of this kind of factors into those decisions and it has to be done in a holistic fashion. That's the main thing I would take away from it is you have to really look at it in total.

Ted: 00:15:54 Is it typical in that context that the investment side and the finance side of the University are communicating with each other?

Steven: 00:16:02 So it's interesting. So as part of this diagnostic I did on the Tufts endowment, universities across the board do it differently. In some instances, the CIO reports into the CFO, which I view is somewhat problematic. In most instances they report into the COO. At Yale, David reports into Salovey. And so some of that may just be because of his status and what he's done. But I do think it matters. Like the reporting lines matter and I think that will influence investment and it'll influence all kinds of things.

Ted: 00:16:37 I think I'd be remiss, you know, you mentioned a conversation we had with Warren Buffet about the Tufts endowment, what did he say?

Steven: 00:27:41 That was awesome. So first of all I didn't even realize it, so you may have remembered it, Warren actually ran the Grinnell endowment. So as kind of a nightline, you know, cause his day job was an interesting enough, the president of Grinnell actually asked him to run the endowment. I think this may have been in the late sixties, early seventies. And he told the most amazing story because we were asking him if you'll remember over the dinner, you know, “if you were given to become chair of the Tufts Endowment Investment Committee, what would you do?” The lesson he

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told me is keep the committee small. Ideally a size of one. Two can be a crowd. And I thought that was classic Buffett-ism. But then he kind of talked about how he invested and he said, look Steve, the thing you've got to remember is you should invest it as if it were your own money. And then he told us how with Grinnell he put like a third of the endowment into TV stations and he did it on a highly levered basis. So they put in like $5,000,000 of equity to make a $70,000,000 investment and it was like a 10 bagger. Today Grinnell, it's endowment per student is one of the highest in the country. And that's because the decisions Buffet made whatever 50 years ago. Amazing, amazing.

Ted: 00:17:50 Let's move on from Tufts to a large family office. What are the different board dynamics in the family office context?

Steven: 00:17:59 So it's fascinating because you have the patriarch who's made all the money, who's was an unbelievably successful entrepreneur and then you have the next generation, in this case, the son who is equally able, who runs his own firm where they're effectively an outsource CIO. And so one of the tensions you have is the family dynamic of just the succession of the money over time and you've gotta be very conscious of that.

Ted: 00:18:27 What is that tension?

Steven: 00:18:28 Well, on the one hand you have the patriarch who made all the money and on the other hand you have the son who's unbelievably able and has his own visions of how he wants to kind of succeed on his own. And so you have that constant battle back and forth like any father/son. In this case, because they have so much respect for each other, it really has worked out and one of the things we've done or they've done with Said Holdings is they’re actually pivoting the investment structure to become much more direct investing. And so this is an interesting dynamic. So you have a father who made all his money doing stuff. And the actual corpus of the endowment, if you will, was invested with people pushing paper around, i.e. money managers, and collectively they came to the conclusion this is what I want from my son. Or more importantly in my grandson and granddaughter. And so they're actually going to be re-allocating a lot of the money into direct investing in companies. So we've completely pivoted the nature of the organization and I think it's really exciting for everyone involved.

Ted: 00:19:38 How does the board work with the family? It's their money, it's the father, the son. What's your role in that context?

Steven: 00:19:44 So it's interesting. Many of the board members were more directly tied up with Mr. Said, Wafic, and so they knew Wafic from the early days and so they'll be septuagenarians, octogenarians and will have known him. I'm kind of in between. I'm somewhat between Khaled the son and Wafic,

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so to some extent I view myself as a bridge between the generations where I hopefully can have an equally sound dialogue with both of them. But make no mistake about it, it is challenging because at the end of the day it is their money. But you're still a fiduciary and so you do have to push back. And I found the more productive meetings are the ones where you say no. You say, look, I don't think this is what we should be doing. So one of the things we introduced, for instance with Said Holdings is we wanted to introduce kind of a living will, meaning what, “how are we going to behave in the next downturn?” And actually map out kind of a game plan. Because inevitably they're going to come. This is hopefully gonna take away some of the tension you'd have in the moment. So things like that I think allow you to get away from some of the day to day tension you may have in dealing with someone where his money is deeply personal, right? He's made all this money, he had all this success. But if you can kind of map it out strategically and analytically and systematically, I think it avoids a lot of the emotional stuff.

Ted: 00:21:13 And is there a governance structure? I guess there has to be, you mentioned being a fiduciary. It's not just money in their bank account. There's a trust, there is a foundation, is that?

Steven: 00:21:22 Yes. And they. It's interesting and it's not dissimilar to a lot of other wealthy families. They'll have a dividend, so it's the equivalent of the spend rate, and so they'll have an idea of what their annual nut that they want to be able to spend to take out of the endowment or however you want to think about it. And so in many ways it's very, very similar to Tufts. You should in theory, be able to take the ultimate long view. And I think that's one of the reasons they pivoted towards direct investing because they felt like, look, the expected returns from financial markets are X, whatever you may think they are, we actually think of a way of compounding capital better will be direct investment in companies that are long-term compounders. You know, and I'll give you an example. One of the things that we're kicking around looking at were, UK mortuaries. They're great businesses. That's right. And it's like one of these things where it's actually highly regulated, it's very predictable. And that was the classic case that Khaled kinda talked about. This might be the type of business that we should invest in. And uh, I'm sympathetic to that. It's fun actually. It's very interesting.

Ted: 00:22:28 So we pivot a little bit to for-profit boards, and a bunch of financial companies, so it's Pzena and Equity Data Science, Lightkeeper, curious about how you spend your time? What the governance process is like? And then we can talk about parallels across the two.

Steven: 00:22:44 Pzena is the best one to talk about because I've been on the board for about 10 years, he went public in 2007, right before the crash. And right

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at the peak of the value was probably the last time valued outperformed. And I had known Rich. He actually hired me at Bernstein. One of the things Rich was very cognizant of constructing his board is he didn't want anyone on the board who needed to be on the board.

Ted: 00:23:10 To collect a check.

Steven: 00:23:11 I'm a firm believer in that, and he actually did want friends and family, not family but friends on the board because he wanted people that will look out for, you know, not just his interest but thought like him. And so, you know, some people would argue that's nepotistic or that's not the way you're going to lead to good governance. I couldn't disagree more. I mean because we know each other. Joel Greenblatt's on the board as well. Charlie Johnson who had run distribution for Morgan Stanley and Dick Meyerowich who was headed one of the accounting practices. Because we're all friendly and know Rich, we can call BS.

Ted: 00:23:50 It’s the right kind of friendship.

Steven: 00:23:51 It is, it is the kind of right friendship. And so you'll just. So the meetings are so much more efficient because there isn't a lot of process and procedures like, look, these are the five things we got to get right. And so we ended up being much, much more focused on the health of the enterprise.

Ted: 00:24:08 What might those five things be?

Steven: 00:24:10 So right now one of the things they've been really wrestling with as are a lot of managers, distribution, right? So they've got an unbelievably strong institutional footprint and so all the consultants love them. They're one of the few value managers who stuck to their knitting. They do what they're going to say. They have a defensible, definable niche with that group, but their retail distribution just isn't where it needs to be, so what do we do? Do we go out and hire a bunch of people? Do we go out and partner with somebody? And so we'll have deep dives at a board level meeting going into that issue. What strategically should we do? We're still debating it so I don't have an answer for you, but that's the kind of thing that to me will have a much greater impact on the ultimate value out of that firm if we get that right, suddenly you can have a step change in the valuation.

Ted: 00:25:03 And so you as a board member without retail distribution expertise personally, what do you view as your value added in that conversation?

Steven: 00:25:12 In that instance, very little. Whereas Charlie Johnson who ran a big part of her Morgan Stanley has been super helpful. Like both in terms of hey, we should talk to this person or hey, we should get a presentation from him or her and so and that's it. Whereas, you know, Rich often looks to

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me for our discussions on internal compensation because my experience at Maverick and elsewhere and at one point, so like seven years ago, they were getting pinched hard from hedge funds, because they were making all of the money. Or my Morgan Stanley experience, at one point they were losing people to broker dealers, and so that would be my value add. Like not just getting the McLagan Reports on what people are being paid, but what is the reality of it. And so that was often times where I could add value and now you know, one of the things I've talked to them about is, you know, would a Pzena product fit within an endowment model and so you know that for their core product, probably not, but they have a very focused, kind of a 15-position portfolio. Guess what? That actually would fit into the way in an endowment looks at the world. So hopefully I can bring that expertise to the Board.

Ted: 00:26:17 So that type of board where, let's say familial but the right kind of family and people are going to call BS to each other, is that something that an investment committee of a family, or certainly a family, or an endowment could think of as a different way of constructing the board?

Steven: 00:26:36 Yes, and that's what Wafic has done with Said Holdings. And that's a good analog Ted, because that's exactly the way he thought about it and I give him credit. He's like, look, I want people that will say no to me. No one on that board needs to be on the board. We have the family's interest in line, you know, that's uh, that's what we're thinking about it. It's very, very similar. That's, that's a really interesting point.

Ted: 00:27:01 And is there a way for a university or a foundation to pull that off?

Steven: 00:27:06 It's harder. Maybe a foundation but with a university I think there's so many stakeholders it's really, really tough. I mean, the main thing I've taken away from the Tufts experience is I had massively underestimated the complexity of your university and it's been really interesting. So you see it inevitably when you have a new board member come on who's a titan of industry. So at Tufts we had a bunch of, you know, CEO of Pfizer, Bristol, Dupont, and a bunch of Wall Street clowns like myself. And you all come on the board and you're like, oh, why can't you just fire all these people? And then, you know, like the academics were like, um, have you ever heard of tenure? You know? And then he started thinking about like community relationships, right? So Tufts is actually in about seven different cities we’re in Medford, we’re in Somerville, Boston, Grafton, which is where the vet school is and those types of relationships and then you have the student relationships and then you have the alumni relationships and it's like, oh my gosh, they are so much more complex and then, you know, getting into pricing.

So we had, we had a meeting about two weeks back on this, you know, everyone's like, oh, college prices are just way, way too high's everyone

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charging $70k a year. It's all, it's running amok, it's all crazy, blah blah blah blah blah. List price is almost completely irrelevant in college pricing right now. The average person at Yale is being charged about $24,000 a year.

Ted: 00:28:30 Because of financial aid?

Steven: 00:28:32 You got it. And so there's all these layers of complexity where, oh well what is the income? So people making between zero and $40,000 actually pay nothing to go to Yale. Right? And so there's so much more nuance into the actual management of the enterprise or institution that make it really, really challenging.

Ted: 00:28:50 So what is the optimal board structure for an institution like that? We'd talked a little bit about sort of subcommittees, but how about sort of in the context of the types of voices around the table?

Steven: 00:29:02 You do need diversity. You need some representation of the various stakeholders, but look, the reality is money does make unfortunately the world go round. And if you think about the problems, quote unquote, any school like Tufts or anyone have, a lot of the solutions are more endowment or more money. So, it's a really tough thing Ted. You do need bluntly a bunch of folks around the table that can write big checks, right? I mean that's just the reality of it, but I think what you need, so the typical university board will probably be 30 to 40 people and then what you really need is a strong Executive Committee where you have about 10 people that are kind of running the corpus day to day with the administration. And then you try and get expertise at the committee level, so looking at curriculum, looking at advancement, endowment or a fundraising, whatever you want to call it, risk, so on and so forth and so it's, it's, it's challenging. It's very challenging.

Ted: 00:30:01 So let’s turn to another body, the body of government. You spent a little bit of time on this group with the Treasury. What was that like as a Board experience or Advisor experience?

Steven: 00:30:12 It was bizarre. The Office of Financial Research was kind of put in place in response to the financial crisis and so Dick Burner, who was the Chief Economist at Morgan Stanley, I've worked with super able, thoughtful, smart guy. He helped assemble the team of volunteers to come down there and I guess to me what was odd was there were, there were a bunch of Nobel laureates on this board. You had a bunch of very high-powered risk managers from Morgan Stanley, BlackRock, places like that, but what was challenging about it was because we met so infrequently, it was kind of like drinking from a fire hose when we got down there. So we only had a few meetings each year and there wasn't all the committee work or the interim work that really allowed you to feel like progress was being made and so what would happen is we'd go down there for the day

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and the meetings would be just chockablock. You felt like, oh my gosh, I'm drinking from a fire hose. And so my takeaway from that is I really do think you need, when you're thinking about governance, if you can cut it up in smaller bites, I do think it's more effective.

Ted: 00:31:25 What was the mission of that group?

Steven: 00:31:27 I think it was to sit around and get input from thoughtful people about, OK, what are the next big systemic risks that we have to be contemplating? So in that sense it was very helpful because you had senior women from Wells Fargo and she was talking a lot about cybersecurity. And so for someone as an insider from a, you know, one of the largest banks in the world to be able to articulate the urgency of that to D.C. pol's was very valuable. And so to me that messaging was the real value of that body where you could have practitioners tell, you know, “this is what I worry about day to day.”

Like you're out here worrying about the housing market. That's yesterday's battle. You know, we do have a tendency fight last year's war and I think that happens often in government. What this body was set up to do was to think about what's, you know, next year's problems.

Ted: 00:32:23 Was there anything actionable that could come of it? Other than, high quality idea sharing?

Steven: 00:32:28 It is high-quality ideas sharing at the end of the day. I think one of the things, the other learnings from that experience was you don't want to be too ambitious, you're not going to change the world dramatically. It's more about, OK, if we can get up, set up a systematic function where we're having the ideas brought among a group of reasonably thoughtful people about what we should be worrying about. That in and of itself has value.

Ted: 00:32:53 So let's turn to the last bucket of things that are probably just the opposite where you can have a meaningful impact and sort of early stage companies. So you've done this now twice with fintech companies and they're probably half a dozen others I don't know about and what does that board dynamic look like and how are you trying to add value in those contexts?

Steven: 00:33:12 That is so much more hands on direct helping the enterprise generate revenue. So I'll give you two examples. Would be Lightkeeper, which is a Fintech company that looks at performance attribution software. It's much, much more than that. It was founded by the guy who invented Tamale, which was a research sharing platform and then Equity Data Science and in both instances it's very much, “hey, could you get me an intro with John Jacobson at Highfields” or “could you get Roberto

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Mignone to try out the platform?” Or “hey, what about Maverick? What's Lee thinking about this?” So I think a huge part of my value add is bluntly just hey, picking up the phone and saying “this is a pretty cool product, could you give it a shot?” And I think my ability to open doors there is actually pretty good. At the end of the day the products got to fly on its own merit or not. And then we just actually had a Lightkeeper board meeting last week and this was interesting where you can also be helpful strategically. So should we pivot. So right now Lightkeeper iss only in the hedge fund vertical should we go in the long only vertical as well? It's pretty easy thing to transfer to. And we had a bunch of folks from Morgan Stanley prime broker on the board. I'm on the board. Other folks like that, and we basically came to the conclusion that the wallet share, we're only in about three percent of hedge funds. Their ability to pay and the ability to track performance on the short side is actually really significant to hedge fund managers. We decided why don't we try and get more wallet share of the existing vertical rather than move over into say a Pzena or an Alliance Bernstein or whomever. So those are the types of things where hopefully you can add value as well.

Ted: 00:35:01 So now let's talk a little bit about your own little company. We started a year ago talking about and you have your sort of family office with your wife. How's it going?

Steven: 00:35:11 It's been great. It really has. It’s been satisfying. We’re making a few shekels. We're having fun. We're kind of doing it our way. One of the tensions we talked about earlier is, you know, I, I don't have a lot of interest in having a lot of employees at this point in my career, so we've engaged in some interesting outsourcing things.

Ted: 00:35:29 And what are those outsourcing pieces?

Steven: 00:35:30 Couple things, one is a CFO, which is someone who will write the checks. Keep the electricity going, things like that, but a couple of other things we've looked at. We're actually currently working with a group of Indian analysts where it's an outsource effort where we give them very specific marching orders. If we want you to look at this company this way, could you do the workforce, do a deep dive on it. These are the parameters we want you to do, and 24 hours later you get back a file and you go at it. I'll give you a couple examples, so we're looking at Dish again, which is Charlie Ergen’s thing and we wanted them to do a true deep dive on the Spectrum assets. It's pretty arcane stuff. You know, there's a lot of nuance to it and we basically said, hey, go at it, and they've put together really high-quality work.

Ted: 00:36:17 Is this financial models?

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Steven: 00:36:19 Some of it is financial models. A more direct financial model is we asked them to look at the Aetna/CVS merger and what might come out of that. So that would be a very specific financial forecast. Discounted cashflow, here's synergies, here’s cost synergies, here's revenue synergies. What are some assumptions on it? With the Spectrum stuff it's much more looking at, it's almost like an acid value analysis. OK, they have this band here, what are comps in the market trading for and what's the asset value to it. But it's been an interesting exercise and I personally like it. The tension, not the tension, but you know, the, the thing we're going to have to decide is do we really want to grow this sucker and turn it into some outside capital?

Ted: 00:36:57 There’s business itself. You have some outside capital now?

Steven: 00:37:00 We do. We’ve taken in a separately managed account, which has been great. We do have some friends and family money and um, that's kind of the challenge is do you want to give up the lifestyle stuff? Because the minute you take a dollar of outside money, you have to be on it 24/7. That's just the way I feel. I mean, it's just the way I believe.

Ted: 00:37:20 You’ve spent a lot of time at Maverick. You had your own fund. You have well-resourced hedge fund with lots of internal analysts, very smart people. You have what you can afford on your own. Now you’ve got Indian outsourcing. What do you think the analytics of companies in the financial industry looks like five or ten years from now?

Steven: 00:37:40 I mean everyone seems to believe it's all about artificial intelligence and counting the number of cars in Walmart parking lots and things like that. And I look Ted, you know, I'm just, I'm sure it's just, but I have to believe I still prefer what Todd and Warren and Ted do, which is kind of the three of them have very little incremental and analytical resources. They're trying to find good undervalued businesses and just own them for a long time. But I'm swimming against the current because all the dough seems to be moving more towards quant, more towards artificial intelligence, more towards data scraping, all these kinds of things. And I just think that's a tough game to win. It's kind of like an arms race and some folks can do it. I think at the end of the day it comes back to judgment.

Ted: 00:38:37 Even in the way that you like to approach things. What's the difference in the quality of the analytics you're seeing from the outsourcing team in India and the variety of analysts you've worked with directly?

Steven: 00:38:51 It’s very comparable. And then the difference is this is really directed, highly, highly directed where one of the, one of my faults as a, as a leader of analysts in the past was I tended to give people too much rope and let them kind of wander on their own little paths to find truth. Whereas here, because it's such a frankly commercial relationship, it's, “no, these are

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the eight things I want you to do and this is the order I want you to do ‘em and I want him by this period of time.” And so in a weird way, it's probably been good for me as a personality type because I've probably too much of a marshmallow previously with my analytics teams. Whereas here it's like, “no, these are the things I need to know. Go do it.” More mercenary.

Ted: 00:39:38 What are you seeing now in the markets?

Steven: 00:39:40 You know, the, the frustrating part of it is you're still getting. We still been in a market where it's a highly, highly momentum charged market, so if you look at the factor returns to value versus the factor returns to momentum. They're about as divergent as they've been since the tech bubble. And so that is the frustrating part. The good part is we're finally getting some volatility back in the market and you're finally being able to add some pretty decent alpha on the short side where companies that are, you know, either in bad financial position or, you know, woefully out of step with their product mix are getting whacked if they're missing. And people are starting to uncover that.

So the good news is you are just it. It feels as if the kind of monolithic march up of 2017 is coming a little bit to an end. And then the other good news is valuation spreads in the market are wide again. And so that shouldn't lead to very robust returns for active management.

Ted: 00:40:43 You seem to be the hub of lots of interesting ideas and people and information. What is the kind of the most interesting thing that's been thrown your way over the last year?

Steven: 00:40:54 I still come back to education, so it's either Success Academy or Tufts. And so with Success Academy it's and you know this well and you've been a huge supporter of ours so thank you, but you know, we're now up to 15,000 kids and they had the highest test scores in the entire State of New York. The average family income is $35,000 a year. So, one of the things we're now contemplating is, “hey, wouldn't it be really interesting to think about what is the true societal financial benefit of this Academy?” And the reason I say that is if you look historically for that cohort of income population in that that were there, they're located a very large number of them would not end up going, certainly to college. Some of them to end up incarcerated or whatever. The financial impact. We get the emotional stuff. So I'm, I'm, I'm mister softee, I totally get the emotional stuff, but what is the actual financial impact of educating at a very high level at scale 50,000 kids? 100,000 kids? Whatever the number is, and that's one of the puzzles I think we're going to try and tease out over the next year.

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Ted: 00:42:15 Place that in the context of call it the macro environment and trends and technology. You have on the one hand, there's this incredible success of Success Academy taking a huge number of kids and giving them high quality education. The other hand you're putting them into an economic environment in five or 10 years that feels a lot tougher from a human capital deployment of resources. How do you put that in the context of an assessment like that?

Steven: 00:42:44 It raises the urgency of what we're doing. Their only hope to compete is if we get them educationally up to par with where they should be. And so look, I'm getting all sappy in my old age, but this is our first graduating class at success at 17 kids. So I got involved 10 years ago that 17 is going to be 50, 200, 500 within five years. All 17 got into college. I think one of their parents had gone to college. So if you think about that and the ability to compete in what you're articulating, five years out, they got a shot at least now, right? They've got a shot and that's what we want. They wouldn't have had a shop without that educational backing. And to me that's the challenge is “how can we do this as a country at scale?” Forget the politics. And one of the things we didn't talk about is the politics of boards, you know, two seconds on the Constitution Center that is the ultimate non-partisan board. Right the Constitution should be one of those things, we may have different interpretations of it, but let's all agree that it matters. And that was a fascinating board because on the one hand we had the DeVos family who are well-known conservatives, but we had Ed Rendell, you know, a, a strong hold on the democratic side. Or Amy Gutmann at Penn. And we had at one-point George Bush, 41 was the President of the Constitution, then it was Clinton, then it was Jeb, then it was Biden. And what was really cool is, you know, you couldn't have more politically diverse people on that board yet we were all pulling the damn oar at the same time. That's what's really cool when you see boards govern with, with very different philosophies, but still moving.

Ted: 00:44:30 But that’s a rarity.

Steven: 00:44:31 Yes.

Ted: 00:44:32 Let's talk more about the politics of boards. What is it that drives it? Is it human ego? Is it agendas? And, and tell some stories about what you've seen. Maybe some of the ugly instead of some of the good.

Steven: 00:44:46 Yeah. Look, I do think, so I do think some of it is his ego. At the end of the day, you’d like to think we're all, you know, Mother Theresa and doing things for great reasons. But I, you know, there is an ego element about it and victory has a thousand fathers and defeat is an orphan, right? And so I have no illusions. If Success ends up, Success Academy for instance, does end up doing poorly on tests for whatever reason. I don't think it's likely, people abandon it hand over fist. I'm sure you'll see that. And I saw

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it a little bit, you know, with the Constitution Center, it was tough raising money and you had very, very wealthy people on the board that sometimes didn't give quite as much as you would've hoped. That's one of the things you see on the boards where you're looking around the table and you kind of know how many zeros that person has next to their net worth. And then you look at what our actual fundraising has been. And that's not the point to the Constitution Center in particular that's more a general common across my not-for-profit boards are you know, “what percent of your net worth or income are you giving to this cause?” And that's where it can get a little bit petty and a little bit disappointing frankly.

Another thing that you'll often see, and this is true in many of the boards and on, is oftentimes 20 percent of the people do 80 percent of the work, right? A lot of people do want to be on the board just for the prestige or the resume impact. Well, that's no good and so I do think you have to be more thoughtful in constructing these boards, like maybe you just have them as you know, in a, in a university context, it would be the parent's council or some of these other things where you allow wealthy people to have an affiliation with the university without taking up necessarily a board seat. That those have been my biggest, biggest disappointments where people who you know are super able, super philanthropic potentially, and they're just not giving what they could to the board. That can be disconcerting.

Ted: 00:46:42 The notion of job risk in investing is sort of popping into my head because in that situation you have this very delicate balance, right? You have someone who's not being productive in whatever, it could be financial resources It could be in their time and energy, their ability, and yet there's the potential for them to be more impactful. What do you do?

Steven: 00:47:04 It's hard. So the better boards I've been involved with. One of the things, again, coming back to Tufts, you ask leadership to have the direct conversation. So one of the things, the better boards I'm on, they'll have an annual self-review process.

Ted: 00:47:19 Of the board members?

Steven: 00:47:20 Yes. Now not all boards do this. I think they should.

Ted: 00:47:23 Of all the boards you're on, how many of them to do that?

Steven: 00:47:25 Only two and it's Pzena and Tufts. Now Pzena you have to as a public company, you actually have to do it. None of the other boards, Tufts, we do it. It's a little bit less of a self-review, but a little bit more, there's

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what's called the Trusteeship Committee and that's where you'll review the different trustees and there'll be an assessment.

Ted: 00:47:45 Peer review of the other Trustees. Is it anonymous?

Steven: 00:47:48 Yeah. And then we'll do a review of the Chair and we'll do a review of the President, but I think that's best practices. We're going to implement that at Success Academy and I think that'll be a good helpful practice, but look, what you're really getting at in some levels is the is the difference between a not-for-profit and a for-profit. When you're on a for-profit, you're getting financial benefit from the relationship. So at Gansett, if we do well, I'm going to make a lot of money if we sell Gansett 50 million bucks or whatever it's going into my pocket. With Pzena I’m paid, with Said Holdings there's a stipend. So there's, you have financial, now hopefully good board members don't need that where, but by definition on a not-for-profit, you serve at your leisure. I mean you're not being paid to do it and I think that does lead to complications.

Ted: 00:48:36 Steven, the last year I've adjusted the closing questions that I've asked and some of them are the same and we're not going to do those again, but there are a couple that I want to shoot your way that I didn't ask you the first time around. So, the first is what teaching from your parents has most stayed with you?

Steven: 00:48:52 Without question, philanthropy. And not money, it's being an engaged citizen. Both of my parents, it was unacceptable to sit on your ass.

Ted: 00:49:05 Those are two different lessons.

Steven: 00:49:07 As you know, my dad passed a couple years back and in hindsight, you know, I never, while he was alive was his effusively as I should've been about what a good citizen he was. You know, he chaired the Chamber of Commerce up in Providence. He chaired the United Way. My mom has always been incredibly active in the arts and things like that and it wasn't chest beating. It wasn't, you're going to do this. It's leading by example. I saw them do this and it's interesting when we talk to our kids now because they're in their twenties and they're just starting to articulate that like, “hey, you guys actually do a lot” and there's no better feeling.

Ted: 00:49:59 At times people look at it and say, well, once you've made it in your career and some of these non-profits, yeah, there's a notion that you're going to give a certain amount of money, that then down the road you can have time and people will want their money and therefore you can get involved. How do you think about that with your kids who clearly are at the very beginning of their careers? And how should people think about getting involved when it's not tied to being wildly financially successful?

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Steven: 00:50:28 So look, I can only tell from my own experience, but I had zero belief that I was actually going to do well financially. Like this has all been a complete positive surprise to me, but when I first joined Chase straight out of Tufts, I would spend weekends working at the Tompkins Square Park Boys Club with underprivileged kids playing wiffle ball and stuff like that. I was making no money. I wasn't on any board. It was nothing like that. It's just I love sports. I love the kids. I did that. When I joined Sanford Bernstein. I was involved with the East Harlem Tutorial Program. One of the kids Carlton O’Neil, I'll never forget who he was. He was in eighth grade. I was tutoring from eighth grade to eleventh, twelfth grade, something like that. I told them, if you ever get into college, I'll pay for. It sounds very altruistic now, but I thought there's no chance in hell. He's never even been to college. Got into College. He's the first of my children to graduate and graduate from SUNY Oswego. I was at Maverick at the time. I flew up, went to his graduation. He was the first in his family to go to college. I had a, I hope, a really huge impact in that kid's life and it was when I wasn't making any money. Like I was tutoring them when I was 28, 30 years old, whatever I was at the time and it had nothing to do with ego at that point or Success or being on a board.

Ted: 00:51:49 What information do you read that you get a lot out of that other people might not know about?

Steven: 00:51:54 You know, I come back to what Barton used to say is you're much better off reading The Economist cover to cover than listening to CNBC or the Wall Street Journal. So I do tend to look at things like The Week or The Economist or things that are a little bit outside of the traditional Wall Street stuff. I do like reading biographies and getting things like that. So I'm reading Antonin Scalia's papers right now and I do get a lot out of those types of books, but I can't point to anything Ted. And now you've given me something to go and think about.

Ted: 00:52:31 All right, last one. What life lesson have you learned that you wish you knew a lot earlier in your life?

Steven: 00:52:39 Well, it's, it's the importance of family, right? So it's one of those things for all these boards and all this damn stuff I do. I hope it was never at the expense of my kids. I hope if you sat down with them and they'd say, “yeah, dad's, mom and dad, my mom Lucy's every bit as involved as I am with these things. I certainly, God, I hope it was never at their expense. Like I hope, you know, we went to all the horse races, you know, horse outings, baseball games, and I really do, God, I hope that was not, I hope it wasn't an either or, you know. I haven't asked my kids to that. That'll be something to ask, but that would be the life lesson is, you know, family first.

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Ted: 00:53:22 It’s spring training, you are scared. You are scared. So what's going to happen with the Sox? Are they going to finish in third or fourth?

Steven: 00:53:32 Well at this point last year I believe it was Brian Cashman who said the Red Sox were the Golden State Warriors of baseball and everyone had anointed them the World Series Champ. Whereas this year that sounds suspiciously familiar about a team in the Bronx.

Ted: 00:53:46 It does. Doesn’t it?

Steven: 00:53:48 So my guess is Tanaka is going to have a torn rotator cuff.

Ted: 00:53:52 Thanks for saying that.

Steven: 00:53:53 Aaron Judge is going to hit .230.

Ted: 00:53:56 And strike out 400 times.

Steven: 00:53:57 Yeah, look, you're right. The Yankee's lineup is absolutely terrifying. I mean it is, to have Aaron Judge batting second, you know, it's just, it is absolutely terrifying for us.

Ted: 00:54:10 He draws a lot of walks.

Steven: 00:54:12 He does but pitching wins baseball. And so, if Price comes back and Sale can pitch a whole year as opposed to just two thirds of a year and our bullpen can do OK, I like our chances. We’ll have to bet a dollar

Ted: 00:54:26 We will, I have made larger bets and lost. We will bet a dollar on the season. and I'm reminded of the great investment expression that I will share with you now that hope, Steve, is not a strategy.

Steven: 00:54:39 That’s true.

Ted: 00:54:40 All right, until the next time, thanks.

Steven: 00:54:39 Thanks, Ted.

Ted Seides: 00:54:44 Hey, before you take off, I've started sending out a monthly email that shares a small selection of what caught my eye over the month. I get a lot of emails like this and I'm sure you do too, so I'm only going to send no more than a handful of the very best things that caught my eye. If you'd like to receive that email, hop on my website and CapitalAllocatorsPodcast.com and join the mailing list.