Business Pants – 2023-03-15

Live. we're not really live anymore from black rocks, gold-plated, ESG walking closet, it's the ESG Industries, only Weakly woke data, brought podcast, featuring BS man. Matt mcgard and special guest star, Douglas cha or Doug. Yeah why am I telling them douglas douglas that's fine. President of sound board governance joining us for today's show. In today's Eggies spicy grape called March 15th 2023. More bank failure, talk specifically, the anti-esg anti-walk perspective and an ongoing board saber Matrix. Say, I can't talk today board. Super metrics risk assessment. I know you threw me. Matt, you you're complete your production failure through me. As if it's me I hit record and Riverside died. The company we use. I love Riverside, but you know, I love this art show. Today is being sponsored by ESG Data Solutions, provider, you know? You can't. I like that. Don't talk over my sponsorships there. Okay. Now, I don't care, I just saying, I like it. Welcome, Doug. Yeah. Doug. Thanks for Doug from Jersey. What are we doing? I was some uplifting banter right there. You want to just get into it? Yeah, I want to open YouTube would talk to each other a little bit. Yeah, let's get right into it. Come on. No, I'm thrown off by the production fail. Like like we were live for like 30 seconds. You know what? What happened. They were like all focused on like Dei or something. Oh, that's my thoughts. That's right. He training or something. That's the perfect segue for our first segment. Let's do it. Calling this. The crying woke list. Okay, we're talking about we had some fun bank failures over the last week at One svb Financial Group. Otherwise known as the Silicon Valley Bank, we had Signature Bank that's Barney Frank's Bank. And it's not Barney Frank's bank and one guy on the board Silver Gate Capital, all three. Tell you Barney Frank's influences, like 7%. I like Barney Frank. I just say that because I'm from New England. I mean, it's just so poetic I guess that. It's like full circle, you know, in terms of the Dodd-Frank. Bill was supposed to do this. That and the other thing banks are failing and oh he's on the board. Oh Zing yeah it's the thing to be fair to it to be fair to Barney Frank once he stepped down as a politician and became a director on a bank. He actually has been lobbying to roll back, the very regulations that he put in place as a politician. I mean who better to do that. Right. Exactly. All right, here we go. The Crying Wolf list. I, I have, I have accumulated all the various terrible perspectives on this. Collapse and you two are going to chime in as you see fit. All right. You ready for this? Yeah, this is this is basically a depression. Yeah, of course, every show we do is the pressing and no particular order. Let's start with Home Depot, co-founder. Bernie Marcus. Okay, first of all, he comes out with a very pithy quotes. Saying this is the biggest failure since 2008, is that? Oh, is that? Oh, nailed it? That's deep Insight. He said, I think that's seems to be a consensus out there. Yeah, thanks for that burning. He also said they were too busy being woke playing the woke game. What is the Wolf Game? By the way, are we playing it right now? I don't know. Is it important? Yeah. That would come out from like Activision Blizzard. Oh no, actually not, not them, definitely not them. Electronic Arts, maybe he gets right to the point with this quote, not hiring the brightest people but hiring people based on what they look like right to the oh, wow. Not pulling any punches with that. I mean imagine not being a white person. Now at Silicon Valley Bank and you actually have pundits saying that you got hired you're stupider, and you got hired because you're not a white person. That's got to feel good. I mean, this goes back, this is like such a Trope from like the 80s though. You know the 1880s. Like, you know, people used to say this out loud and it was kind of like, you know, when racism was kind of like just okay, it was acceptable, it was part of you know, Comment dialogue. And I'm just like, I thought that was dead and now it's like they're not even being subtle about it. They're just saying like, oh, you know, yeah they hired a bunch of You know, blacks gays and women because I don't forget what happened. Yeah. Oh, and we have that and we have some data about that later on, don't we met? We actually have the actual data about the svb. Yeah, tires. If you want to get into it, get into it, all right? Well like okay, so the percentage if we just start at the board level, where they actually you see generally now at like large cap companies, the highest percentage of non-white people and women are on the board. They're gentle generally not in management. They're generally not in like even like middle management is just mostly bored level diversity. We're talking about and Silicon Valley Bank had approximately 8% of its board where people of color. And by 8%, I mean one guy there was one black guy on the board. He had approximately 7% of the board influence. so, I don't really know what we're talking about. We're talking about being driven by Dei unless he's counting women. In which case 42% of the board were women. And they had less influence than they had body count. They had about 35% of the influence of the board. Yeah, we're talking about a board that's driven almost into what majority by white males. And that's the most diverse cohort. It's Silicon Valley Bank, the board. I don't know if this came from. Is it coming from the fact that it's based in California? Or does it just come from the fact that, like, every company on in the universe? They have a diversity equity and inclusion policies, that work comes from I'm not sure. Yeah. Well, someone looks some yeah. Saying someone went to their website and noticed the word diversity and that was it that was enough to call them because I don't there's no Andy Kessler who's the guy who wrote this discussing Wall Street Journal op-ed. I saw what he went to. He went to one page. Yeah, of the proxy statement where there's one Chart, which all companies have like, four, three or four. Yeah, that shows like okay, there's one black one, lgbtq plus, and two vets. Yeah. And he points that out and draws kind of a straight line or he does the darkness and say I'm not. I'm not actually drawing a straight line. I'm just asking the question, I'm just yeah, maybe it is. Maybe it isn't, I don't know. Here's here, you know, it's for you to judge. Here's the quote from Andy Kessler. He said, I'm not saying 12 white men would have avoided this mess, but but the company may have been distracted by diversity demands. He comes right out and says it too. Yeah. And so it's like okay people like well You know, they're saying maybe In fairness. The the time people are spending on Dei. He's been a distraction. They took their eye off the ball or whatever but it's like. Okay. But why do you rush immediately to that? You know, I mean management is doing many things at the same time. D, i happens to be one of them, but you know, why do you immediately point to that and say, you know, maybe that's like one of the big causes. It's like, okay, you're clearly insinuating something here and other guys aren't even insinuating. They're just flat out. Say, well, I got two issues with that. First of all, it might be a management initiative. But do you actually think management is actually spending any time on those programs or they're having people beneath them creating those programs? I mean, they all so give to like the local YMCA. Right. Like do you think they spend more time on diversity than they do giving to the YMCA? Yeah, yeah. So it's like they should be focus on maximizing profits. It's like they do a lot of things, right? Don't necessarily maximize profits like yeah, like charity. Like, you know whatever saying, good morning to your co-workers, and softball games, and that kind of stuff. It's like, hey, that's stuff, is that there's value there? If you really want to maximize profits, you would cut all those costs, right? But then their company would be Kind of yeah horrible place to. I think they're wasting time on their 30 minute lunch break. I think that's where they're wasting their time. It's too much love. also, we know, we know that like, It's not their management team. I talked about the board their management team was not diverse either. I was gonna say for those of us who spend our time. Yeah, I did this data set. This is one of the most white male companies that we've seen, right? It's an outlier for a lack of diversity at the top. I mean, he says, like, Kessler's, quote is great, because it says a 12 white men, right? Well, there were 12 named executive officers on the website and there's a few in the proxy, right of the website ones where you have 12 named people. There's one one was a Hispanic, man. And three, were women? The chief Frisco officer, who is a woman joined 10 seconds ago. She's been there for two months, there's a lot being a lot of hay being made about the fact that they did not have a chief risk officer for like an entire year. I don't think that means that the department just didn't function. They must have had somebody in that position or acting or whatever. Apparently, the risk committee met a lot during that period. Okay, there there was an issue there. The board had to step in. It's fair to look at the risk committee and say, okay, what, what the heck was up with them? What was he oversight? but, you know then you've got Kind of my friend Professor Stephen Bainbridge on Twitter. Who, you know, you might not agree with his work, but I think it's respected. You know, he's saying that they didn't have a chief risk officer but they did have a head of ESG, right? He did have a chief Dei officer and I'm like, come on one has nothing to do with the other, you know that I mean, what are we like again? What are you insinuating? So, let me, let me take you to one of the problems going on. The Internet, is this lack of reading reader comprehension? I'll call it. Is that they focus on this woman from the UK. Her name is Jay or Sapa. She is the head of Financial Risk at svb UK, which is not part of this at all, but she had some, she was involved with lgbtq issues. She's a woman of color, She's a Lesbian. She's involved with some of these issues and that's I think where the ball got started rolling on. This is that a lot of the anti woke anti. Is she cut crowd focused on her as being the head of risk svb Financial Group but yes, that's right. Matt, they were completely wrong and I think this is where the ball got rolling with her. I don't, I just I'm sorry, I don't understand how a group of 12 individuals, one of whom is non-white in management. Can be considered driving diversity, we made fun of the fact that the people who were sponsors of like they labeled them. It was a CFO was named the white male CFO was named the sponsor of black people and the white male. Chief credit officer was named the sponsor of Women like what are we talking about here? They work this way and they, the funniest part is they made the women that had a human resources which is as jokey a token position as they could think and the head of marketing and they made the head of ESG, they had a marketing right? Like, so she's doesn't have it in her title its head of marketing. What are we talking about? I mean it's this is I mean again so some people are saying hey look financial crisis 2008. Those were all white guys who you know, tanked the world economy. What about that? Like you didn't have minorities and women in charge there and, you know, so there goes your theory. The other thing is, like, look, there are ton of banks that aren't failing. That had plenty of men, I mean, women and minorities in high positions or on the board. And so you'll just want to pick on this one. This one outlier essentially and say oh okay it's all because of Dei. Well yeah what they every company has the so how come every company is not going down? Well what what they won't do Doug is they won't show their methodologies, they won't Define woke, they won't come up with this list of other banks that are high risk because of wokeism because it doesn't exist, right? Because that would be the next step since they're kind of already talking. Like ESG analysts, maybe there should be a list of criteria that they're using to identify what corporations because as Matt. And I know well this company actually is pretty far away from what anyone would consider to be ESG, friendly, woke friendly, whatever it is like women. Loving black, I don't know what we're talking about here but whatever that definition is this is not the company to focus on. Well I mean let's see that that's why I think they you know they have their narrative and they just plug the bank in whether you know, it's kind of like they're just trying to push a certain story and they don't care about the facts. So Saab is an easy one to kind of paint as well because it's California, right? You know, it's Tech and all that stuff. But like since when is Tech woke, you write filled with, you know, a bunch of young guys doing these startups with their dual-class stock and all that kind of stuff. And, and even worse as Tech funding, right? Matt, you had a, what was your your data about? Is it 8% of tech funding goes to female? Oh yeah, no 8% of venture capitalists are women like, people leading Venture. Capital funds are partners of venture capital funds. 2% 2% of startup, funding goes to female lead starters. What are we talking about? And just for the record Bernie Marcus I'm on your Home Depot, diversity and inclusion page right now is it which is a big picture of a drill saw it? No, it's a it, they're telling the fact that they were listed as best employers for diversity in 2021 and this is an Alan Kessler. Wall Street Journal owned by the Murdoch's Fox Corporation. I'm looking at your diversity page right now, if diversity is such a problem, your company's Should be dead also. You're spending way too much time or they should be fired and replaced with a woman or a minority, right? I mean, To take down your all your diversity stuff. Take it all down if it's such a problem. My guess is you won't because you know that it's not actually a problem, you spend no time on. That's company resources to take it down though. I'm so my question is is this the moment that this anti-walk anti is she movement sort of jumps the shark a little bit? Because this is a step too far. Now, you think this is Gonna be here at least with the election. I think this is purely an election issue. Right? You know, I I separate Argument on the investing and corporate practices side with the Washington side of things. So look, there's a legitimate debate about ESG being like, you know, totally, whatever the hell you want it to be. It does add value, it doesn't add value. Is it a? Is it Alpha? Is it beta? You know? So look, those are legitimate arguments. But on the political side and those are arguments about creating value on the political side, we all know what motivates these guys right getting elected. That's it. They don't care about financial returns, they just don't. And so. So I think that next however, many, you know, year and a half It we're just going to their people are just resonates, you know. Jeff sonnenfeld I think put it best he said quote to try to weave woke into this is delusional. I think that about says it all to me because that's because we're now we're now in la-la land, right of like theories. I mean this is pure delusion. But it's just so Insidious that they go straight to this, you know, I mean, totally reminds me of things in the past, let's blame him Grant's. You know, let's it's all this kind of racist slash, you know, phobic some of its veiled others. It's just not veiled at all, and that's what scares me is that look, if it were veiled, that would be more consistent with the age. We live. In the fact that it's not veiled. It's just like, okay, what what do we doing now? We're just going back to the 1950s. Yeah, just just so I don't leave him out. Ron DeSantis potential presidential candidate run. DeSantis said, diversity and inclusion standards are why big banks are now increasingly incompetent. Yeah. Tucker Carlson had a similar line right there. Very close to that. It's easy to slide, I don't know. From whom. But it's like look right. Ron DeSantis. I mean he's got a military background, right? He was in the Navy. Is that right? I think. Yeah. He's got a military. Harvard have a Navy. I didn't know that. Yeah. The yeah to patrol the Charles River. The Regatta MIT coming after this, or be you, but the more afraid to be you. Yeah, but it's like, look, the military is incredibly diverse. Yeah. Right. Of course. And, and they're, they're better for it. I don't. Okay, I want to get your reaction to this one. There was a article in Bloomberg, wasn't Matt, Bloomberg svb exposes lazy ESG funds. As hundreds, back on doomed Bank, they're calling this another Market meltdown, and another costly lesson for ESG. I don't know if you saw this article Doug. Know, I know you did Matt did here's the overall assessment, they're saying there are a lot of lazy asset. Managers taking ESG scores for granted, the point being here, that ESG seems to have with on assessing high-risk at a place like SVP, right? Is that the point? Matt, I don't even know what the point is. Yeah. ESG is supposed to be the great fortune teller to the world, right? It's supposed to predict the day. You're gonna die. Supposed to predict how many times your dog's gonna lick you in which banks will collapse on a win. Well, also, I guess it's seen as like, or people are trying to characterize it as like, okay, ESG? If it's the ultimate like insulator from all the world's problems, then it should have foreseen this. It should have foreseen the Ukraine war all of this kind of seeing that. Yes, G will save all of us. It's a long-term investing strategy. Just like many and the others didn't say less either. You know, like I I took a screenshot of last month. One month ago, sell side analysts Wall Street analysts not he is Gee not whatever Wall Street analysts had svb as a buy. They that was the consensus. Analysts take on svb, and I took a screenshot of the consensus taken. I sent it to the authors of the article and said really ESG missed, or did everyone miss everyone missed because interest rates, crushed the bank and Tech Bros talk to each other. And when you honestly the case for regulation and like, but the case, for diversity, in this case is Arguably stronger because this is one demographic. White male Tech Bros. Usually either Founders or Venture capitalists. Largely from one place in and around Silicon Valley. Who largely know each other banking with white people in one place? If you were to make an argument that like if they had been a little bit more diverse as a deposit base. Yeah, you might not have had a run on the bank because they're not all calling each other being like, take out your money immediately. Yeah, they're concentrated in one industry. That is kind of very tenuous and I guess what? One of the other Banks was very kind of crypto heavy in terms of yes. Until both silvergate and signature were crypto heavy. And so, but the other thing is like, back to this like svb is woke the most woke Bank ever. Yeah. So then why why did Peter kill have his money at spread question? Yeah, that's a good question. You know, the what he say? ESG, equals CCP Chinese right party. It just like, okay, if this was so widely known, why didn't he pull? Out of that bank and go to whatever the banking division of strive asset management or whatever. I don't, should they all be at Bank of America because it's America in the name, it should just be like that really is, you know, analysis, that's analysis for you. Yeah. That's what about that. That was a bank that tried to be kind of like the right wing Bank. Oh, yeah, it already. Yeah, that would fail the immediately. Yes. The best thing was that they wanted to make the credit cards out of like gunmetal and then people couldn't get on their their like, flights. Yeah, that's that. I think they couldn't fit it in the slot for the like the the machines to like, read the credit, they had all sorts of problems with the credit cards, they couldn't get them done. That was great. But what credit cards before, a segue into to you, Matt, for some of your data because we actually do put the g into ESG because so what one of the things the article was lamenting was the fact that there's not enough G and ESG and That's really what we do here. We do a hell of a lot of G, don't we Matt. Yeah we do and there's plenty of G. The number of times, I got told by a portfolio manager, that g they already did, like they knew the management teams and they had like their, they already knew, they knew it better than she from 1999. Very well, but maybe not for 2023. I mean, I just I'm so tired of the media narrative that ESG supposed to solve all your problems and or anything. It's all about data and how you use it I will stop it. I think you know I I Keep saying to people in terms of this ESG being, you know, whatever you want it to be everything everywhere. All at once, you know, you can't, this mashup concept of ESG is very problematic because now you get into the, you know, so it's like, okay, yeah. If it's if a an analyst is looking at G, That means they're looking at ESG. Well, it's all green and woke and all that. Oh, no. It's like look, you've got a separate this stuff out. I mean, I I think these the part, the reason that the this argument that ESG equals what resonates with kind of the average person is that it's like it's a simple ten concept, you know, you don't, you know, if you did some further analysis, you would understand that. Look, this is more complicated and nuanced than you realize, but complication in Nuance is just like forget it. You know that, well, we're not, you know, we're not gonna explain that in our stump speech. Know that's how George W. Bush sold. The Iraq War, was it was good versus evil, right? I mean, it's, it's sometimes you have to rely on that, crutch? Okay, so beforehand off to you, Matt. Uh well I do want to say one thing though. I I do want to attack the ESG industry, a little bit, just for fun is that I actually do think that one of the areas that it doesn't quite understand is the banking industry, I that ESG. And it's however, I built the yes but listen and it's and it's forever just scale to the world, right? It's forever to sell to everything. It could think of, I think it lost a lot of the, the Nuance, right? And I think that one of the things I think it fails to understand is the risk of banks. I also think it completely botches control companies, you know, these fake public companies that we call. And I also think this idea of comparing companies in the United States with companies and Australia and India and China is absolute nonsense. Like I have a global ESG view is non so I, I will agree on that. I don't think they get everything right necessarily but look, I would It. Go ahead, Doug. I have a lot of problems with ESG. I have a lot of quizzes. You know, the the whole thing is messy, you know, it's a free-for-all the promising lot of flaws. I mean, we, you know, much has been said about the flaws of all these rating agencies and advisors, and that kind of industry that's developed around it. So, yes, she's by no means perfect. You've got guys like Bob Echols, who wants to move away from the term ESG? They just hate. They cringe when they hear it. So, so yeah. So I think that There is a lot. Yeah, there's a lot. There are a lot of gaps and holes that ESG is just not able to deal with yet yet, or maybe they're not trying. And it's funny. We've entered a new, a new phase of the history too. Because Matt, when we started this company, in this show, we spent a lot of time trying to articulate our our criticisms of the ESG industry, but now we find ourselves defending. The ESG industry is awesome. It's like when you're, it's like when you're traveling, like you say, you're on a vacation Spain, and somehow defending America because people are who have just met, you are blaming you for Trump and you're like well actually you know it's not so bad where I live blah blah like but even but even the criticisms vsg have expectations first of all the criticisms are largely of the ratings and not the data, the data has its own problems but all the data on financial the like the Sector data is messy, right? Like when you're talking about audited financial statements, you're not talking about something that like there's so much like assumption that goes into those statements. The auditor thresholds for materiality all different like it's Black Box interpretation application, you know, all of that is very gray. It's all gray. And yes, she gets held to the standard because it's new data set that it's not perfect enough, right? The data has its problems. Sure. All the data has this problems but the ratings, they say a thing. We just don't necessarily agree with and is incomplete. It has to like Nuance in order to hit scale and that's the thing that bothers you down, right? Like the scale issue of course in order to get to a global coverage Universe which is what BlackRock wants a Vanguard wants and all the buyers of the day to want. You have to give up something and it's usually nuanced because doing nuanced actually takes. Yeah it's like the sales and marketing team came into the nerdy research from pantsed everybody. Right. It's like, yeah, yeah. Throwing their lunches at them and be like now, we're taking over this now. Like, we, we're gonna take over the data and the analysis. And, and because a lot of the decision because we were talking about this before. Matt, there there are, when you're trying to sell something at scale like this, you make these strange like budgetary decisions. Like no, we can't collect all the committee data because we're trying to be lean and mean, and make a profit and right there. So the data does get messy when you're trying to go to scale so quickly, I think, but the fact is, Is Gee has different and more data than a lot of traditional Finance sink God as a starting point, right? Like so, I just don't Like the media narrative around ESG and its failures presupposes. What the marketing team has been selling. And this is the big problem. The marketing team says, ESG is sustainability and it will change the world. And that's not what it ever did and that's not what it does, and that's the gap. Let me head off. Yeah, go ahead Doug. Well, I mean it's again it comes out the definition and interpretation of this term ESG. What I hate is when you hear or read something that says, yes, she is. The concept of doing well, by doing good. It's like, no, that's not what ESG is. You know, for a lot of people yes, she is purely a risk, mitigator right? Yeah. And yeah, there, I would say effectively that they're trying to like be virtuous and sure that's that might be one version of ESG. I think it's more. Yes or but, you know, It's a good point, though, because really, another version of ESG is what Vivek ramaswamy strive Asset Management, the same, which is pervert the data in a different direction, and we're going to Target, we're gonna Target companies that that promote diversity, but it's the same ESG data. They're using to Target those, right? That's the grant for a different races. Yeah, both ways. Right. Exactly. You know, the religious funds, you know? Look, yeah. There are kind of like the Catholic values funds and stuff like that. That's a version of es exactly. Yes they are screaming out companies that are involved in the abortion industry, their values. Yeah. So it's like, hey that's the ESG. Sure. I don't see why. It's just a liberal concept. I love it, but, but nobody wants to ban those funds. Let me know. Let me segue to you Matt because I know you want to get out of here before 5:30, which is why four hours from now. A few things. Let's take this back to the who will take just the G part of this discussion. So first of all, Elizabeth Warren saying that we should call back all the pay from the executives and Shark Tank star. Kevin O'Leary It's blaming negligent board of directors, with idiot management. That's where we come in and we like to talk about. We do like that and not only that, I'm glad it was Kevin O'Leary who was one of the big investors with SBF. And sure. He was talking about negligent boards and let's talk about the negligible for the idiot management. All right, let's talk about idiots. well, not idiots, but problems. All right, here's what I did. I'm gonna, you can sum up as VBS who problem. Yeah. Really. With just a couple of bullet points and I'm going to make a vague attempt. There's a lot more you could say. But let's say, this is a starting point. They had no risk. Experts on a risk committee at all. Seems probably but it seems problematic. They had outside executive influence on the board itself. Does that mean, meaning the executives exert, certain influence over the board? And we can measure that the executives had more influence in a place like svb. Then you might see in other boards, you know, help you plug board, saber metrics. Yes. So what you're saying, there's no real oversight. If there's if there's outside executive influence were there other than the CEO was there? Anyone else like Insider board members? There was one other inside or on the board and and actually svb wasn't the worst of this Signature Bank and had Brigade in silvergate. Had 70 plus percent of their their board influence was in the executives, right? So that were on the board. In fact, in signature Banks case, this is Barney Frank's big failing. The risk committee was like three people, two of whom were Executives at the bank, that the risk committee was just the executives, which clearly and, like, whatever hand watching the fox house. Yeah, it's bananas, I will say this, the pattern that we did discover is that for all three of the failed Banks. They had a group of two, three or four long. Tenured men who controlled over 50% of the board influence Central board within a board that controls the boardroom. Yeah. So, and this is the, this is the value of using something like, influence rather than just counting the body, where the msci is. Because when you look at msci, or any of the other interpretations of this board, the you do miss this new ones, right? And then specific to svb the most of the board was from Stanford. Which means you have like a solidated groupthink problem, right? Like, they'll come from one place. And a lot of them had exposure to the financial crisis. They're kind of a version of failed up, Bankers. There was Freddie, Mac. There was Arthur Andersen. Like, these are people who had been places that were part of failure before and once again, failed their way up. Yeah. Making the case that because the four people who control that board, three of them want to stand for seven out of 12 and you've already pointed out the lack of diversity. Once again, Matt, this does point to a company that might have benefited actually from more diversity for us, now, so, That svb that's like your background music to the svb's failure. Now, the market though svb's gone, the market is worried about other mid-major and some a couple of major Banks. First Republic is down 65% in the last five days. Zions, down 33, US Bank Court, 2018 in Wells Fargo, Capital One to B of A are all down too. City is down pretty substantially. Most of these banks have a thing in common which is a large uninsured, depositor base. Right? What people are worried about is that all the sudden went people woke up, To something that's been the case for 10 years which is you're only insured up to 250,000 dollars. Now, all this on everybody in, this is why I'm call it. We call it the other day, a 1% or bank run. Because if you have more than 250,000 dollars in cash, in a bank account, you're a corporation or you're incredibly wealthy, right? Like that's that's it. And now you're freaked out that the rest of your deposits may not be insured past 250,000 dollars and now you're calling each other and saying, oh are the banks? Do they have, you know, duration mismatches between their assets and liabilities like, what's happening? Are we capitalized enough now? Everyone's kind of freaking out about that. So they're hammering the banks the stock market right. The question is, should they be worried? So I actually think you can predict a 1% or Bank Run. In our data, we have a 168 publicly traded US Banks and that includes the big Diversified and the regional and Banks. This is US Banks us. We're only looking at the us right now of them. There are 2000, just under 2100 active directors, okay? All of them have risk committees for the most part, or some risk function at the board level. Yeah, that is standard practice in the United States. We have data on 128 separated out risk committees. So already, there's a, there's a cohort here where risk is like deferred to a parent company or risk is folded into a governance committee already. I'm nervous about those but I'm going to ignore those for right now. Because if you are banking out a bank that has no risk committee or some dual function committee that includes risk, you should already be asking yourself. Okay. Who is minding the station? That's that's problematic. But let's focus on the ones where we have risk committees. Those risk committees have 700 or so directors that it. If you think about it this way, there are about 700 people in the United States, Who oversee, the entire banking sector of the United States risk, right? 700 people, entrusted with measuring the risk of the US banking system. Question is, who are they, right? Okay. Let's talk about some of them, okay? Talk about 82 of. These banks have added one risk expert or more to their board. Meaning fully half of the United States Banks. Do not have a risk expert on their board. When I say risk expert, what I mean is somebody who was an academic interests who have had a risk function, a chief risk officer at a financial institution who worked at an insurance company in a risk capacity. Someone whose job it was to measure Financial or non-financial risk that specifically laid out as their title. This is an msci, ESG tagged item, okay. Half of US Banks. Do not have at least one risk expert on the board. She's Problematic to me right off the bat. Yeah yeah and so I mean presumably the FED, I mean the FED does monitor this kind of stuff and so this level of new ones does it? Well, it definitely it has definitely has corporate governance prescriptions and I think a risk committee is part of that. but you know, but to play, you know, Devil's Advocate in this True sense of the word here. you know, people are gonna say well, okay, it's because You know, the woke left, forced them to put an ESG expert on or a climate expert, or they were too busy putting women on my and minorities on the board. Now, Is that true? I don't know, but that's going to be part of the narrative. All right? Well, the demographics of these banks are largely white men, right? Like the larger, you get, the more diverse, they tend to get. So, when you get to like the Bank of America City Group size, they tend to be more diverse. But we're talking about 168 Banks and there's maybe five that are so large as to have diversity as a much more core issue for them on the board. And those are places where they're getting the cream that they pick, whoever the fuk they want out of the talent pool, because they're that large because they can. Yeah, the vast majority of these Banks. Including when we look at, like, the Silicon Valley, Banks more than 90% of the influence of the board is white male influencer. I'm, there's not, there's not like much debate about whose controlling the boards. So, the diversity argument, You might count a few women on the board and say, look it's because there's women on it or look there's a black guy in that board now and that replaced a chief risk officer and that guy and that by definition means he's not qualified that. Yeah, because he's black, he's not qualified if you if you fall for that ornament, yeah, that's entirely bulshit. There's more than enough board seats to have a risk expert on delusion word. And there's more than enough risk. Experts who are non-white or have vaginas, or whatever you want like, whatever you're disqualifying. Dei thing is, yeah, there's more than enough. And yet. Only 37 banks in the United States. Put their risk expert on the risk Committee of the board. That means half of the banks that have a risk expert actually. Used that risk expert in the risk committee capacity? Yeah. Well you just selling my point Matt, is that I think that the ESG ratings companies do need to look at companies like this in a different way, right? There's a different way to articulate the G. At Banks know is not what the point you're making. Yeah, I think that's right. I mean, it's kind of like, like you said you've got to kind of look at each thing by industry exactly what applies to the industry and part of the problem with these ratings is the kind of one size, fits all You know, like you said scale, it's it's hard, you know, Sesame tried to break things down into like, 79 different Industries like okay, yeah, that's the right approach. It's not going to be perfect, but at least they're trying, yeah. You know, the rating agencies I, you know, I don't know to what extent, they break it down, that that far, not that, they don't. Yeah, they compare svb Financial to, you know, all birds shoe company. You know, I mean, they, they actually they don't do anything with industry. Well, I guess like, what S&P Reason they kick test out. Partially was because they were bad relative to their industry. Here's Yeah, some of it right in labor because they have extraordinary amount of controversies. A Tesla. I think I kicked out for the swastikas on the wall in the bathroom, right? The new seasons in the in the warehouse that's that. Did that helped do the men and Kimball musk on the board helped anti-union. Yes, CEO. Right. Yeah, they had a lot going against them, but yeah. So let's talk about like some patterns, right? Okay, there's one pattern here. That's the token risk committee because we are establishing that all these banks have some sort of risk function at the board level. But seven of the companies that I'm talking about had risk committees where the members of the risk committees that were not Executives, had less than 10% of the board influence. Well, yeah, I'm glad you mentioned this, too, because this is another, this is what I always complain about. Is that there, I think that actually, you know, ESG 1.0 the the data set I think is interesting, it's good, you know, congratulations but this belies the need for ESG 2.0, right? Like why aren't we shouldn't we be at the point now where we're analyzing the committee structures and analyzing who sits on these committees? I mean, what are their skillsets right? Yeah, but they don't, but they don't do that, right? We haven't gotten to that stage in our industry yet. So, if you have a risk committee where the Vast majority of the board, outweighs your influence like the decisions get made somewhere else. Then is that risk committee really functioning as a well a useful unit. What you'll often find is that you'll find that some of the new board appointees who don't make them the quote unquote more important communities. Get they just get kind of dispersed to all the other committees and and those tend to be the people who have according to our data, very little influence right there, maybe they're token appointees or whatever they are strange, it's just like such a strange disconnect because it's so logical. If you have a risk expert aren't you going to put them on the wrist, right? Why that's probably why you chose them, you know, I mean so I don't get it for those companies. But I mean, these risk committees they tend to be you know, every financial institution deal that I've worked on, you know, these these risk committees they meet a lot and they're always looking at like loan loss reserves and liquidity and you know yeah and and you know all the reserves and kind of capitalization. And so, you know, part of me thinks that, you know, you guys look at Sabre metrics and stuff like that. I look at other things I think. People don't know about, you know, part of me wonders. Well, okay, there's the committee. They meet they might even ask have experts on them but what is management presenting them with right? Yes, BB good question. Okay these guys met a lot. But it's another kind of what did they know and what did they know it? So maybe management didn't even make them aware, what was going on in this kind of implosion and the Bad Business decisions they were making in terms of these these mismatches. So I think you know, that's where the investigation has to go. Yeah, they look at the minutes and all this stuff and say. Okay what did these guys actually talked about? Right? And what information did management provide them with because signature is good. Yeah, signature is a great example. What you're talking about because their risk committee met four times last year. And two of the members were Executives of like a three-person risk committee. So, you're when you actually dig in to the things you're talking about, which is like how it actually runs. So if we've got data on, who's got the power decision, making power and you combine that with stuff like did they meet, what did they They say, what did they get? Shown you start to see a real picture of humans. Ignoring problems, or looking at problems, like concretely or whatever the case may actually be. It's true. But to be fair, unlike the audit committee say, which by regulation, has to have three independent members, and nobody connected the company, that's not the same of the risk committee. It isn't the same, right? It's not the same. Yeah, I don't know if Federal rules have something on that, but, you know, signature Banks risk committee only met four times Etc. Then I really, you know, I think there's got to be a lot of pressure on Barney Frank. It's like, come on, man. You are Mr. Like, let's get hard on the banks or let's come down. Hard was he was he was yeah. Was was but still, I mean, it's his nature. Sure. And so it's like his political nature. You say. Hey guys, why isn't this committee meeting more like, what are you doing here? Don't forget. He was representing western Mass, a liberal like, Bastion and there in Massachusetts, he was representing his constituents at the time. I, you know, that was maybe there's a lot of political maneuvering and maybe when he was that sphere, he changed, you know, he had political maneuvering, you know, I tell directors, look, if you're gonna go on a board, you better know what you're getting yourself into. If you're going to make decisions, you better be ready to defend them in a senate subcommittee, hearing where Elizabeth Warren is tearing you a new one, right? You know, that is a scenario that you could be faced with I want to see does that committee subcommittee bring Barney Frank in or Elizabeth Warren? He's if they were some intellectual honesty going on, she would take him to test. So I want to see if Elizabeth Warren is able to get Barney Frank in there and just destroy him. I love that. Um, here's all right. Here's the rest of the short list of like tokenism, like red flags and they include token risk experts, where the actual risky, there are 18 companies, where risk experts on the board have less than 5% influence on the board. They're totally fucking pointless like that. You have them to say, you have a risk expert but no one cares or was that your way of telling people to buy our data is that we're trying to say, well that's you have to get all this. So yeah. Um the outside executive influence, if you have a board where more than 50% of the influence where it's effectively sort of a fake pump public company, not buy structure, not by like dual class shares. This isn't a Zuckerberg but you've stacked the board with enough Executives. That they make all the decisions on the board itself. Then you really just investing exclusively and Executives and no independent oversight. There is an oversight of the executive and that kind of goes to my Point in terms of the yeah if it's dominated by management, they're only going to they're going to be able to present whatever. Exactly. In the way that's favorable to them and you know hide other things or tell him, hey, it's it's okay we got this, you know, we can manage this. I love the idea that in Signature Bank, the two Executives, who sat on the risk committee were voting on what to do at the risk committee after presenting as management to the risk committee, right? Like they basically presented to themselves and then voted. Yes, like that's great. The last thing I want to point out is there is actually one company, this is upside, this is good news. There's one company that has a risk committee, that's run by the risk. Experts of all the banks, there is one citizens Financial one 66% of the committee influences held by Rick experts, and they aren't executive's so congrats. Yeah, congrats is just that are So, if you were going to find the next 1% or Bank Run, you would look for a large proportion of uninsured deposits. You would look for no risk experts, even though they have a risk committee, right? And it turns out that short list includes Signature Bank, who's dead? Svb. Who's dead First Republic? Who's the one getting hammered right now in the market? They're down more than 60%, they have a tremendous amount of executive influence and they have a risk committee where even less of the influence is, is independent like it's basically they're basically If you took Signature Bank and you made them bigger and did remove the crypto that's First Republic. So there's problems there. What about, I mean, did you look at Schwab because Schwabs and other bank that's really Under Pressure right now, but they are kind of like the big well-known, you know, I would imagine. Well, capitalized and I'm like, why are they getting hammered? Here's the funny part. They're bored have fundamental flaws. The, their, their Schwab is not even considered a bank. They're considered like a custodian and an asset manager, a broker dealer a broker-dealer. So they're not even subject to some of their banking division. Is subject to the bank regulation, but the majority of their revenue comes from someplace else and which case they're getting hammered for reasons that are like nerves and the uninsured deposits in a portion of what they do rather than and the money market funds rather than the majority of their business, which is what we're dealer. But I will say, there is a, there is a real governance risk a place like Schwab because it influence there's control by one man. Yeah it's controlled by the Schwab on the Schwab wall Schwab. Yeah. She yeah. I think she's on there too. And that leaves us with M&T and Fifth, Third Bank, both of which everyone's freaked out about. But if we were to actually there, I could keep going into a list of smaller Banks, where they have a risk committee and a risk expert, who's not on the risk committee and the executives on the influence. But the fact is, I think it's it's not even worth going. Into suffice it to say that. The 1% Bank Run, you're seeing it, play out in the market right now, they're getting hammered, the most arguably out of the bank's stocks. But there are a bunch of smaller banks that no one's really looking at that. No one cares about who have pure token risk, 100 like deep executive influence. And there is you should be asking questions if you wanted. Like, who should I trust? Like shortlist and to ask questions about it would be there are other Banks. They're not the ones who are getting hammered, so, here's where. Okay, yeah, yes she is. Something you pay attention to because it's the G here. Yeah, sure. Yes, recovered. You know, if they looked at what you just rattled off Matt, that's pretty obvious. You know? Yeah. Why shouldn't the analyst should be like? Oh let's look at the risk committee. Let's look who's on them and obviously they didn't. Well, that is in that case, you know, you do have to agree with the Bloomer article that if you are relying solely on ratings and solely on a surface level articulation of the of the governance at a particular company, then you're not doing your due diligence because what Matt pulled together, he pulled together in a couple of days, right? I mean this is the kind of together this morning, right? There's a kind of thing that you can absolutely be spending time on, right? I mean, there are obvious next steps, right? You want to look deeply at who's on the risk committee and whether or not you like you should be asking you want to engage with them and ask questions about it you want to ask your regulator is this, okay? Right. Like should it be the condition that there is not a risk expert on a risk committee or when there is that they're outnumbered by Executives or that executive take up so much presence of the book like you want to ask some follow-up questions? Should it be treated like the big three committees where they all have to be in? Yes, right. Of course for banks. Yeah for banks yeah audit kind of certified risk expert or you know designated with that kind of thing. Yeah, all good questions and it doesn't take that long to do when you look for it. That's the amazing part to me. Maybe they don't know what I'm looking for until they listen to this episode, man. Maybe that's until if they got to the 57 minute Mark. Congratulations to you really well done. This is just the Oscar music where they're pulling. Yeah, playing us off. Yeah, they're playing a song. We should. Any last thoughts before I round us out and get us out of here. Now, my last thoughts would take us into the next episode. We'll have you back. We're gonna have you back anyway that stuck. I am at the Scotty. It's Damian Ross. We are free float and soundboard. Governance, go check them out. And shout out to our sponsor s gauge forgiving us. Some of the data that backstops the things that we build here at free flowed. If you want ports ever metrics come and get it if you want. Soundboard, governance and their advice. You got a call Doug Doug from Jersey is your man because you can't get that here at free flow. Until next time we're tomorrow, we're gonna dissect Larry Fink's ESG letter form, do it. Come on let's get back to it. Come check that out otherwise we'll see you next time until then goodbye.