MBA Masterclass Corporate Behavior and Performance: The CEO Factor

Abbie Smith: Companies, you know, sort of did well, which is really fun to kind of -- in fact, it's more fun to watch the old ones 'cause then you kind of...

Kara Northcutt: That would be fun.

Abbie: ...get to see what happens.

Kara: Yeah, that's a great idea! Been thinking about that lot with our New Venture Challenge companies from like back in the day.

Abbie: Yeah, exactly!

Kara: Hey everybody who's just joining us! Obviously, we'll start in a few minutes but if you wanna let us know via the Q&A where you're joining us from today, that would be great. We love to know where everyone's from. I happen to be in Northwest Indiana, a small town called LaPorte, which is about an hour and 10 minutes from downtown Chicago. And Abbie, I believe, is in Chicago.

Abbie: I am! Beautiful here today.

Kara: Yeah. Istanbul, Turkey; I've always wanted to visit. New York.

Abbie: Kara, maybe we should ask them for television show recommendations.

Kara: Yeah, we were chatting about TV shows we've been watching in the pandemic. So if you have any suggestions...

Abbie: Yeah, right. Put 'em in that chat box!

Kara: Exactly. I know, I feel like I've finished many of the streaming services at this point. Awesome, great. Julie. All right, everybody who's just joining us now we're just gonna, you know, just get everybody checked in for a few minutes. We'll start a few minutes after six but feel free to let us know where you're coming from and any movies or TV recommendations you might have for us.

Abbie: Most importantly!

Kara: London, great. Go check out our new campus in London if you get a chance when everything's back open. Someone just mentioned their chat is disabled. I'm able to see it. I don't know if Jeff, if you could maybe look into that? I'm not sure if there's anything we could do for Utkash.

Jeff: We're just gonna have the Q&A open tonight. Chat box will be disabled.

Kara: Oh yes, I'm sorry everybody. Yes, please use the Q&A.

Jeff Traczewski: Yup Q&A will be options for our guests tonight.

Kara: I was gonna say that in my opening. I totally forgot. Thank you, Jeff! Yes, we'll use the Q&A function today. "Frozen." I've seen "Frozen" quite a bit with my nieces. Great. We're from all over the world. This is fantastic. India, Wisconsin, Texas. I've actually never watched "Lost" and it's always been on my list as like, a rainy day -- I'm surprised I didn't get around to it in pandemic. Oh yeah, "Sound of Metal," very high on my list. I heard it's a little heavier, no pun intended, but I very much love the main actor. He's fantastic.

Abbie: Who's in that one?

Kara: I'm forgetting his name right now. Oh my gosh. He plays a heavy metal drummer who's losing his hearing.

Abbie: Oh!

Kara: So it's also a very good, sound audio movie. Like I was thinking about "A Quiet Place 2," which I wanna go see in the theater. I've also -- Riz Ahmed! Thank you! Riz Ahmed is his name. He was in a really great miniseries on HBO years back called "The Night Of." I really like him in that. He's great; he's also a rapper, hip-hop artist. Singapore. "Derry Girls" is hilarious. I recommended that. I always like that one for a laugh.

Abbie: Which one?

Kara: "Derry Girls."

Abbie: Oh, I haven't heard of that one.

Kara: It's hilarious, Netflix.

Abbie: I'm gonna take some notes here. "Derry Girls."

Kara: Yeah, we'll have to look at the chat afterwards.

Abbie: All right.

Kara: All right, so everybody, we'll get started. I'll give it one more minute for everyone to flow in. And just a reminder, we're just using the Q&A for a recommendations of what to watch and where everyone's from.

Abbie: Very highbrow here. What to watch on television during --

Kara: Yay! Faculty are people too, right? Humans just like us. And it just reminds me of all the places I wanna visit as soon as we're all able to do so. Be back out and about.

Abbie: For sure.

Kara: OK. Great. Well, to be conscious of everyone's time we will go ahead and get started. Welcome everyone from -- we have people from all over the world, so it could be morning, evening, afternoon. Regardless, we're thrilled that you're taking the time to engage with us today. My name is Kara Northcutt. I'm a Senior Director of Employer Engagement and Admissions at Chicago Booth. On behalf of the evening, weekend, full-time, and executive MBA admissions teams, we're thrilled to welcome you to today's Masterclass, titled, "Corporate Behavior and Performance: The CEO Factor" with Professor Abbie Abbie. So I'm joined today, obviously, by Professor Abbie and also one of our PhD students in accounting, Maria Khrakovsky. So throughout the presentation, as you submit questions via Q&A, Maria will keep an eye on those and type answers as she can, and we'll try to get to as many as we can. And then we will also do an open Q&A after Professor Abbie has finished her presentation. And then my colleague Jeff Traczewski is also on with us from the executive MBA admissions team, so feel free to pose any admissions questions that may come up. And then one other heads up: For polling for today's session, we're going to use a website called Menti. So it's www. M as in Mary, E-N as in Nancy, T-I.com -- so, menti.com -- and Jeff will put that in the Q&A so everyone can see that. Just maybe put that and have it bookmarked or ready for later. You'll click on that and have a code that Maria will provide. That's just a unique way we'll do our polling today. So again, feel free to use the Q&A throughout. We'll keep an eye on that. And then, you know, we do our best. If we can't get to your questions, of course, email us. We're always happy to help after the fact, as well. OK. So, today you'll get to experience two key components of the Chicago Approach to business education. Our data-driven and evidence-based approach helps you learn how to ask the right questions, think more strategically and analytically, which prepares you and gives you the confidence to take on the business challenges you're experiencing today, tomorrow and well into the future. Another key advantage of the Booth MBA program is our supportive and collaborative community. At Booth, you join a group of current students, alumni, administrators that are all really here for you throughout your entire MBA experience: whether it's academic advisors, career services, wellness, diversity, individuals focusing on D and I, really we're here to make sure you have a great experience. And of course, an integral part of that community is our faculty. The same faculty teach across all of our MBA programs, so no matter what format you go, you're gonna get that same high-level quality education and the same faculty teaching. And the faculty do truly also become a part of your network. So I'm very excited for get a little experience of that today. Professor Abbie is a Boris and Irene Stern Distinguished Professor of, excuse me, Distinguished Service Professor of Accounting. Her research --

Abbie: That by the way, that by the way means you're old and you've been here a really long time.

Kara: I like it! You should all be so lucky to be called distinguished, in my opinion. Thank you, Abbie. Her research on corporate governance and transparency was stimulated by service on corporate and mutual fund boards and the heightened interests in these issues resulting from the wave of accounting scandals that began back in the day with Enron, which I'm sure many of you're familiar. Rent corporate governance research examines what we call quote, "the CEO factor" in explaining corporate behavior as manifested in the relation between CEO lifestyle and corporate reporting, insider trading, risk management, bankruptcy, financial performance, and social responsibility. Abbie is a member of a variety of boards and has been throughout career, which I'm sure she'll talk more about. But HNI Corporation, Ryder Systems Incorporated, Dimensional Funds, and Chicago-based UBS Funds; and has served on audit, compensation, finance, and governance committees throughout her tenure. And this insight perspective has really heavily influenced her approach and research, and teaching. And I'm thrilled to now hand it over to Abbie so you can hear about that from her. Thank you very much.

Abbie: Thanks Kara.

Kara: Of course!

Abbie: So: Thank you all for coming and welcome! This is a mock class and it's actually adapted from a portion of the first week of the FSA or Financial Statement Analysis class at Booth. So this course actually has four basic goals. The first is you're gonna learn skills to analyze, interpret and project financial statements. You'll learn how to assess the value of companies and their risk; and you'll learn how to identify and to quantify new value creation opportunities firms may have. Secondly, you'll get exposure to a variety of public sources of information that are particularly useful in this context. And we'll talk about what should you look for, and where should you look? The third goal is to give you a strong appreciation not only for the usefulness of FSA but also, what are the limitations of FSA? And finally, some new ways of thinking. So what we're gonna do today is start off with an overview of the six steps we use to analyze a company. And you're gonna see this is pretty different from a traditional approach because we start by trying to understand the top executives and the corporate governance systems that actually holds them accountable. To whom? To the investors. And we do this for a couple of reasons. First, it's gonna give you a lot more context to actually interpret the financial statements. For example, if the CEO or the CFO has a legal record, even -- and when I say this, people often start to get a little nervous in their seats -- even do they have merely speeding tickets? And if so, should you trust the numbers a little bit less and spend more energy trying to evaluate the probability that those earnings numbers have been manipulated. And in this class, we'll talk about how you can do that. The second reason is, it's gonna make you better positioned to make more accurate forecasts for both your risk analysis and for valuing the company and its stock, such as anticipating a major strategic shift. So I'll share with you one of my sort of classic examples I talk about in class, where we'll look at a change in who's in charge at PepsiCo. And by looking at the person's track record when they were running a division, we can anticipate the shift in mindset in the CEO role -- and how that foreshadows a major strategic shift of PepsiCo that led to spinning off a major chunk of the company. So we'll look at how you might have anticipated that by using our framework. So: Where did this way of thinking actually come from? Well, as Kara alluded to in her introduction, all faculty at Booth are very influenced in their thinking by academic research, and the research is compelling here. The evidence is strong that executives have first-order effects on what companies do, and they respond to their incentives. Secondly, as Kara also mentioned, I've had the pleasure of being on the inside of some companies, through boards and board committees, where I've been able to see how a variety of decisions are actually getting made, and what information is coming out to the public about those decisions -- as well as listening to a ton of earnings calls with the analysts, where I get to look at, what do the analysts focus on and what do they tend to miss? And with that background, when I've been teaching this course over many decades -- probably too many years to even count -- here we have, we're on the outside looking in, trying to figure out what's actually going on at these companies based on available information. And so, this class is designed with a goal of giving you an edge to sort of see behind the curtain and try to anticipate better than others, what will happen next? So all the weekly assignments have been designed to do this and illustrate some principles that are actually really timeless, like: people respond to incentives. So the goal here is that after you leave Booth, it's gonna serve you really well throughout your career -- even though as we know, accounting roles and the resulting financial statements are always gonna be changing. The second thing we're gonna do tonight is to illustrate a few examples from joint research I have, on what I'm referring to as "the CEO factor." And this refers to the link between the mindset -- or "type" as we'll call it -- of CEO or CFO, and the behavior and performance of the companies they run. And finally, as Kara mentioned, we'll have time for open Q&A at the end. OK, so: What are the six steps that we go through this quarter? First is an overview of the firm -- and this is very qualitative, but it's key. Second will be to understand the dynamics in the industry or industries in which the firm competes. The third is where we dig into the financial statements and crunch the numbers. Fourth, we will analyze the reporting quality. In other words, can you trust the numbers? Fifth, we'll take all of your insights from the first four steps and you will make educated guesses -- and summarize those in forecasted balance sheet, income statements, and cash flow statements. Which will then enable you to complete step six, which is to you use those forecasts to do the arithmetic and value the firm and its common stock. And at the end of the quarter in teams, you will all produce a comprehensive, fundamental analysis and valuation and have an opportunity to present your work in front of the class. So what are we gonna do in each one of these steps? So step one, the overview of the firm, which I mentioned is qualitative, is gonna have three building blocks. First is the management. Secondly is the executive compensation and the more broad corporate governance systems. And the third is the strategy at a very high level of the company. Too often this step is overlooked, in my opinion, in FSA classes and frankly in practice. So: What are some of the key questions we're gonna look at in each one of these three building blocks? Let's start with the management. So who are the top executives? What is their background? What is their experience? Do they have special expertise? Have they worked together for a long time? Are they close to a normal retirement age? What are they saying about their mission; about their values; about the culture they've created at the firm; about their priorities; any financial goals; and their outlook for the company? And then finally, what is their management style? Turning to the second box or building block, which is compensation and governance, here, we're gonna switch over and look at the annual proxy statement. And this gets filed with the SEC prior to the shareholder meeting on an annual basis. And one of my, one of the alum of Booth, who is a very well-known hedge fund manager, who is largely responsible for building up that business at Citadel named Jim Hoeg -- when he came to the class last quarter, he described the proxy statement

- - and in particular, the information in the proxy statement about executive compensation -- as the most underappreciated information that's public, underappreciated by investors. And there's good reason why he thinks that. He's made a lot of money looking at this information. OK so, some of the things we'll look at are, for example, how much are they paying? Are they paying enough to attract top talent, but not too much that it looks egregious? Do they have intense incentives or not? So we're gonna look at sort of salary versus pay for performance. We'll look at, and this is a really important one, what performance measures are the executives being rewarded for hitting and what specific targets are disclosed? This gives you a window into the board room and the C-suite where they're debating what the management ought to be driving to achieve. And this gives you that sense more than anything I'm aware of. You know, Jim gave a great example of a company where he noticed in the proxy statement looking year after year, that that company's bonus plan was capped and the bonus payout would not go any higher once the earnings number or earnings per share reached 20 percent growth year to year. And Jim became absolutely perfect at forecasting earnings per share of that company; made a lot of money doing that. And it was 20 percent EPS growth. You'll also wanna note any changes in the performance measures because this is a leading indicator of a change in priorities of the management team. You get what you measure, OK? The next item will look at is the mix of short-term and long-term incentive plans. And this gives you a sense of the time horizon of the executives and the vesting period of the long-term incentive plans -- where prior to vesting, if the executive leaves, they leave the money on the table typically. So this gives you a sense of, you know, they're shooting for at least this length of time, and can also give you some clue about the power of the retention incentives that are introduced by the compensation package. Then finally, you may get insights into risk taking incentives from the shape of the payoff distribution. And I think a nice example here is: Suppose you had two companies who's both used a ton of executive stock options, which you can tell out of the tables, how in the money and out of the money they are. And suppose one firm, they're way out of the money. Well in that case, the executives may think, "You know what? We have to be bold. We have to hit it out of the park or these will expire underwater." In contrast, the other company, they have the same amount of options, but they're way in the money. Those executives may say, "You know what? I'm not gonna rock the boat. I'm just gonna let business run as usual and we'll end up well, personally." Overall, you also wanna look at whether the incentive plans and pay packages are aligned with the corporate strategy and, are they likely to support value creation for the shareholders? So, let's look at example of some aspects of the management of Amazon. And then we'll see whether their compensation plans seemed aligned with this aspect of their management. So in item one of the 10-K, where companies describe a lot of aspects of their business, Amazon clearly articulates their mission in one sentence: "Be Earth's most customer-centric company." That's their mission, period. And then they identify four core values in Amazon's culture: customer obsession, passion for invention, operational excellence, and long-term thinking. Then in the original letter Jeff Bezos wrote to the shareholders when they went public, so first letter in 1997, he articulated the management style at Amazon and here were the key features: customer focus; investment decisions tied to long-term market leadership, not short-term profits that Wall Street may be uptight about; actively managing the mix of business -- which, by the way is one of the most important things executives do. So, you may downsize or dump the low-return businesses and pedal to the metal on the high-return businesses. They continue to learn from successes and failures. They make very bold investment decisions if they see a probability of becoming the market leader. They emphasize the present value of all future cash flows, which is what drives the value of the firm and shareholder value, instead of short-term accounting earnings results. They spend wisely and very lean, so it's a frugal corporation. And they focus on hiring and retaining talent to motivate their employees to think like owners. So let's take a look at some of the key features of their executive pay packages. And this is from analyzing the compensation discussion and analysis, and the four executive compensation tables all reported in Amazon's proxy. What about the amount that they pay? Well, salaries to the executives are actually very low but they make really big bucks if the stock price performs. Pay mix? Heavily loaded up with incentives and they use RSUs, or restricted stock units, for their incentive plans. What performance measures do they use? Nothing but stock price. They don't have any annual plan, incentive plan, tied to any accounting-based earnings numbers. And I've never seen a company like that, by the way, because they said it would discourage experimentation. If you had an annual plan with an earnings target, then people might not be inclined to think about all new businesses they might go into. Instead, it's all long-term plans tied to stock price. Vesting period is the longest I've ever seen -- five to six years for their RSU grants to vest -- and they absolutely have as a priority fostering long-term shareholder value. Overall, I think we could say their compensation strategy supports their business strategy. The second component in comp and governance we'll look at from the proxy statement is board monitoring. And here are just some examples of some features of strong board monitoring that investors are looking for. There's a decent proportion of directors that are independent. They have diverse expertise and perspectives. They have expertise that matches the strategy. They've got a mix of the old and the new, where the old or longer-tenured directors tend to have very deep knowledge of the firm and its history -- and the newer directors bring a fresh perspective and can give you clues about new initiatives. For example, Amazon a few years ago added a director from Merck, a pharmaceutical, before making a little acquisition of pill pack and going big time into being a pharmacy. They, 2019, they added a director that used to run Sam's Club, important unit of Walmart which increasingly is becoming a rival of Amazon as Walmart goes into e-commerce and Amazon goes into brick-and-mortar retail. So these new directors could actually foreshadow initiatives the company is going to emphasize. Are the directors engaged? So they're attending the meetings and they're not on way too many boards. Are their financial interests aligned with the stockholders? For example, I've never seen a board like Amazon where they get no cash retainer or cash board fees. Instead, periodically, they get restricted stock units, just like the executives do. And then finally, is there an independent chair or lead director? Final aspect of comp and governance is gonna be shareholder monitoring and evidence suggests here that someone with a block of stock is way more likely to actively monitor what the managers are doing, and they're called block holders. So, we'll look in the stock ownership table, see if there are any of those. We'll also, while we're there, look at the ownership of the officers and the directors and note anything special, like: Is the founder still there and do they maintain voting control of the company, like Mark Zuckerberg does at Facebook? OK, the third building block in our first step is from the 10,000-foot sort of level. What does the firm do? What are its mix of businesses and what kind of business models do they use? Where does a firm do business? What is its strategy for competing? What is its strategy for growing? Is it thinking long term or short term? And what are the key risks and opportunities that they have? OK: In the next step, which is analyzing the industry, you're in luck because there are fantastic reports that are readily available on industries that we'll expose you to this quarter. And they'll focus on, you know, how big are particular markets? Are they growing? Are they shifting? What are the drivers of performance in the industry and how are they doing right now? Are there major trends rippling across that industry? And what does the competitive landscape look like? And as we'll see in this class, some key issues are: Are the firm's markets big? Are they growing? Are they declining? Do the firm businesses have a competitive advantage? And if so, is it sustainable? Like: Warren Buffet calls it economic moat, a sustainable differentiating advantage. And if it's sustainable, how long do you think it's sustainable for? And this is gonna be crucial, by the way, when we get to forecasting future profits and rates of return. So in this second step we're gonna look at management; comp and governance; strategy; the firm in the context of the industry dynamics; and we're also going to extensively cover where you're going to look for this information. Then we're ready to analyze the financial statements. And we'll start crunching numbers with the best of 'em: looking at profitability, cash flows, investments, growth, risk, and so on. And we'll look at a very modern framework to disentangle the impact of the financing activities from the operating activities -- the latter of which are usually where value creation is coming from. And it helps prevent the scenario where effects of what the finance team is doing may mask any trends in what's going on with the actual business itself. Now: A lot of traditional FSA classes start here, and what is the problem with that? Well, as I alluded to earlier, you don't have any context for really interpreting the numbers and you're likely to make inferior projections. Because you're gonna be very tempted to just extrapolate your spreadsheet financial statements into the future, which is a very mechanical exercise and less likely to anticipate some really important value-relevant changes in the firm and its performance. And frankly, it's kind of boring to jump into financial statements with no context. In contrast with our approach, after the end of the quarter, every time you pick up financial statements, you're gonna start picturing the faces of the executives whose imprint is left on those financial statements in what will become a very obvious way. Now with our approach, we're gonna take insights from our first two steps and help you figure out -- and tell the story behind the numbers that have implications for -- the future. And it's really fun! It's kind of like, have you ever walked into a movie halfway through the movie or 15 minutes after it started? And at that point, you gotta figure out what the story is. So who is the main character? What are their values, priorities, flaws? What challenges, what opportunities do they have? Who are their rivals? What is the hero doing to win? Is it working? And what is going to happen next? So that's how I think of where we'll be at with step three. Step four, we're gonna analyze reporting quality and you'll develop a healthy, informed skepticism about whether you can trust the numbers. And our focus will be the quality of reported earnings. We'll apply a framework for assessing the risk that the earnings have actually been overstated. Are there heightened motives the managers have at that time to overstate earnings? Do they have opportunities to get away with it? Do you think those executives have the propensity to misreport? And are there some red flags in the accounting numbers themselves? We'll also look at a widely used fraud prediction model that's tied to accounting numbers and ask, how might you improve it? And I'll challenge you to think about that, given the framework we'll discuss. And this will illustrate a recurring theme in the class, which is: If you combine your FSA frameworks and skills with the quantitative skills you're gonna develop at Booth, it's gonna be a very powerful combination 'cause you'll be able to model things in new, interesting ways. The fifth step is to take your insights from the first four steps and summarize your educated guesses about what's gonna happen to the firm in a financial model; that is, projected balance sheet income statement, cash flow statements. And the way we're gonna do this is largely based on the way the firm is managed. So for example, the inventory holding period will be 45 days. They're gonna take, on average, 30 days to pay their suppliers, and so on. And learning how to build a financial model this way is gonna be really conducive to what-if scenario analysis, which is a powerful approach for identifying and quantifying value creation opportunities. Which leads us to our final step, which is to value the firm and the equity. This is gonna be arithmetic applied to your projections of earnings and cash flows, and your assessment of the risk. As I said, it's gonna be easy for you to run scenarios and quantify value creation opportunities. For example: What if you could lower the inventory holding period from 45 days to 30 days? What is the implied change in the value of the stock? This will be a piece of cake. You'll have a one-line assumption on the inventory holding period that's linked to your projections. You change one assumption, that's all linked to the arithmetic of your valuation and in two seconds, you get to see the new stock price implied by that change in the way the company's managed. This is gonna be useful in a variety of decision contexts. So now, I'll hand it over to Maria to launch your first Menti poll, which will ask you to tell us what area you hope to work in post-MBA. So if you would go into your laptop or PC or your iPhone -- whatever you're using -- and go to menti.com, and use the code showing on the screen, we'll see who's attending today. Can get hypnotized watching the screen. Menti, if you've never used it before, is so cool! There are some with little balls bouncing around, and it's kind of fun to see what the participants are thinking. OK, well I think that gives us a good sense of our group today and probably a pretty good sense of the Booth community for the students. So we've got a lot of corporate management, entrepreneurs, management consulting, private equity, investment banking. Some undecided, some others, but it's a really good mix. So let me now, I'll take the screen back over, and let's see. Here we go. OK, everybody, can you see the screen? My screen? OK. I take that as a yes. OK, so: So why is, or how is, the information in this class gonna be useful in these various career paths? Well if you wanna be a manager or an entrepreneur, it's gonna be incredibly useful for running your business and thinking about how to create value. If you're going into management consulting -- specifically value-based management consulting or private equity -- it's gonna give you tools and frameworks for thinking about how you might create more value than the management currently is. If you're going into lending, default risk for investment banking, valuation of securities, valuation of deals, equity analysts, forecasting earnings, and stock recommendations, and so on. So it's gonna be, these tools and frameworks will be applicable in a variety of work environments. Now: Throughout the quarter we're gonna use what we referred to as the "4-Box Framework." It's really nothing more than a way to organize your analysis and your thoughts into four connected themes: management, comp and governance, industry strategy, and the results, including shareholder value. And one of the things we'll underscore in this class is how important it is to identify connections among these themes. For example, does management have the expertise to pull off the strategy they're using? Do the executive compensation plans support the strategy? Do the margins and returns, rates of return the firm is earning, seem to make sense given your sense of the competitive advantage the firm has, and so on. It's also important to note any changes in any of these key items. For example, if there's a change in management; or a change in the composition of the board; or change in the way they measure performance; or a change in the industry dynamics; or the corporate strategy, you could expect a change in financial results and shareholder value. But also, if there's a change in financial results -- like deterioration in performance of the firm or of a particular segment, for example -- that could foreshadow a change in management, a change in the way they measure their performance, a change in their strategy. So it goes both ways. You're constantly gonna be updating your four boxes and making special notes of anything that is changing considerably. So now I wanna focus for the rest of the evening on one component of the first box, which is management style. Now there's decades of research by people in economics, finance, accounting, and other fields that have tried to understand what drives corporate behavior and performance. Like, why do firms do what they do? Why do they invest the way they do? Why do they finance? Why do they report? Why do they perform the way that they do? And for decades, researchers have looked at country-level explanations, like differences in countries rule of law; differences in their accounting methods; differences in their tax codes, and so on. Industry-level factors like intensity of competition or how dependent a given industry is on raising external capital and firm level factors, like: How big is the firm? What opportunities does the firm to grow? Notably, for decades researchers ignored the individual executives in charge. It was as if a robot was running the firm -- and identical robots -- so that if you had multiple firms that were identical with identical circumstances, the executives would make identical decisions: But that's not true. And it was when Marianne Bertrand on our economics faculty, and Antoinette Schoar, a former PhD student who's now on the faculty at MIT, published a paper called "Managing with Style: The Effect of Managers on Firm Policies." This was a seminal paper that changed the way researchers started to think about why companies do what they do. And very cleverly, Marianne and Antoinette tracked high level executives from one firm to another -- and by doing so, were able to isolate the impact on firm decisions and performance of those individual people, because you could measure them in different firms bringing the same style. And so for our purposes, that suggests that if you consider the track record of a given person, given executive -- either on the current job or in a former job -- it has potentially important implications for the behavior and performance of the firm they run now in the future. So it could be useful to look at their track record. So here's the, one of my favorite examples but you could come up with bazillions of examples of this, I'm quite sure. But this is Roger Enrico. And he had been running one of PepsiCo's three big businesses: restaurants. Their other was food or beverages, and snack foods. So Roger was running the restaurant segment and he got promoted to CEO of PepsiCo in 1996. And he replaced Wayne Calloway, who had been at the helm for a decade and was obsessed with growth: and in fact, growth and earnings per share. Their only accounting-based performance plans, both short- and long-term, had EPS as their sole performance measure that they were tracking. And growth was everywhere! It was on the cover of the annual report -- determined to grow, grow-grow-grow, everywhere! Everywhere that we're gonna look to try to get clues about priorities. And in his final letter to the shareholders, Calloway said, "Growth is pure oxygen," and talked about growth being the central feature of the culture of PepsiCo. So growth, growth, growth. Now when Enrico was running the restaurant business, he made some changes that suggests that he's got a different mindset than his predecessor, Wayne Calloway. And in particular, he reduced investment, made the business smaller, the restaurant business smaller. So he started reducing investments in their low-return restaurant business. He sold off restaurants to franchisees, so they'd still got some franchise fees but without tying up as many assets in the business. He aggressively started closing the poorly performing stores and he shifted capital spending out of this low-return restaurant segment. And he made a bunch of other changes. He introduced a worldwide joint purchasing program to use the bargaining power of PepsiCo. He consolidated administrative activities like payroll and accounts payable in order to enhance efficiency. And my personal favorite is he had restaurant concepts share their facilities to improve asset utilization. Heaven, right? You could go to Taco Bell, hunker down in a booth for lunch, stay there all afternoon and without leaving, you can have KFC for dinner -- all in one facility! So this is asset utilization. What's asset utilization? It's a rate-of-return ploy. And clearly unlike his predecessor, Enrico was thinking a lot, not just about getting big, but what rate of return was PepsiCo earning on the invested capital? Within a year of becoming the CEO, PepsiCo announced they're gonna spin off the low-return restaurant business. So before the spin off, PepsiCo's huge! It's got beverages, snack foods, and the three big restaurant chains. After the spinoff, it distributes all of the stock in this wholly owned restaurant subsidiary and gives it away to the original shareholders of PepsiCo. So that after that spinoff, PepsiCo shareholders now own shares in a smaller company that is just beverage and snack foods. And now there's a separately traded, separately managed restaurant company now called, "Yum! Brands." Now this improves the rate of return considerably on PepsiCo. Clearly it's gonna lower earnings per share. It's got less earnings, because these businesses were contributing dollars of income. So there's less earnings overall and no change in the number of shares of PepsiCo. Outstanding! So earnings per share is clearly gonna drop, probably something his predecessor would not have done. The market was caught, at least, somewhat by surprise 'cause the stock price jumped 11 percent upon the announcement of this spinoff decision. So: Would a savvy analyst anticipate this? Well if we use our four-box framework, starting with management, has anything changed? Yeah, we got a new CEO with a slightly different mindset and he stated that he was gonna do a strategic review of the whole company, which new CEOs often do. But in some of these other themes, if you looked at the industry report, you would see the fundamentals in the restaurant industry had changed unfavorably. So the industry had become very mature. It was saturated with restaurants in every corner. Competition was really tough. You had to start pouring way more money into innovating and capital investments; profits and trends in profits, both margins and returns, were low; and the outlook was not good. And the industry was downsizing and consolidating, which is not unusual for mature industry. In addition to that, PepsiCo had already started cutting back its dollar investments with Enrico in charge of that business. And in their beverage business, their biggest business, they faced more aggressive competition from their main rival, Coca-Cola. And they needed to focus on that. If you looked at their overall financial results and their segment results, you would see the decline in their rate of return in margins, particularly in the restaurant segment. And you'd see that their stock price was underperforming: Got 10 percent versus Coca-Cola's whopping 61, and 28 for the market overall. And of course, poor financial performance would have unfavorable effects on the executives' pay. So if you combine and connect these dots, I would argue you'd have a pretty good shot at anticipating what Enrico chose to do. Now: Off-the-job behavior can also give you insights into management style. So in addition to looking at their track record on some job, you could also look at their lifestyles to get some insight into their management style. And this, now I'm gonna give you some examples of my recent research agenda with Rob Davidson of Virginia Tech and Aiyesha Dey at Harvard Business School. And we asked a simple question: If you look at the lifestyles of CEOs based on background checks, does it capture differences in the CEO's mindset that they carry into the job, leading to predictable differences -- on average, not for all of them, but on average -- in the behavior and performance of the firms that they run? And the answer is: Absolutely! So we consider two aspects of their off-the-job behavior to try to get, capture their mindsets. One is their legal record, anything from reckless endangerment to speeding tickets; and secondly, whether their lifestyle is frugal. So let's start with a more obvious one, whether they have a legal record. In here, we're gonna look at or rely on the prior criminology and psychology literatures that suggest that a greater propensity to commit crimes is associated with relatively low respect for rules and low self-control. And, really interestingly, even minor legal violations can capture differential behavioral norms. And one of my favorite all-time papers is this paper by Fisman and Miguel, published in the Journal of Political Economics in 2007, where they looked at unpaid parking tickets by diplomats of the United Nations: So in the parking area near the UN, were these parking tickets paid or not by the diplomats? And what they found is a strong correlation between not paying the outstanding parking ticket and the corruption index of the diplomat's home country. So that sort of shook everybody that, whoa! It doesn't take much in the way of legal record behavior to capture differences in behavioral norms. So the first thing we look at is the propensity to perpetrate reporting fraud. So if the CEO has a prior legal record, is reporting fraud by the company more likely, and is the CEO or the record holder more likely to be named as the one who perpetrated it? So to put this in perspective, the framework we used for risk of reporting fraud, it was really trying to capture the perfect storm. So you've got motives that are elevated to inflate the earnings number, like bonus plans or debt covenants tied to the earnings; or you wanna boost the earnings to boost the price of securities because the firm is out there raising capital or the insiders are selling their shares. Do they have opportunities to get away with it, like weak monitoring by the board and the shareholders, and a relatively low quality auditor? And do you think the executives have a relatively high propensity to perpetrate fraud? And we'll also consider the red flags and the accounting numbers themselves. So our research is really trying to get at one way you might capture propensity to perpetrate fraud -- and if the answer is yes, it may help you improve fraud prediction models. To get a sense of why that's valuable, on average -- in the year after they are actually reporting fraudulent numbers so the news comes out -- on average, the stock price drops, adjusting for what the market's doing, by 41 percent and the median's even worse. And the following year, it dropped by another 25 percent on average or 44 percent median. So it's catastrophic, on average, when news comes out that you've done this. So clearly, if you can do a reasonable job identifying high-risk companies, that would be a valuable thing to do. So what do we do? We have 109 publicly traded companies who perpetrated, reporting fraud, and we match those with 109 companies who did not perpetrate fraud. And we matched by industry and by firm size. Now what you're looking at here is the totality of the legal infractions on the records of the 109 CEOs of the non-fraud companies. And they had no serious prior crimes and a total of nine fairly minor traffic violations. Let's see how this graph compares to the legal records of the CEOs of the fraud companies, and see if you see even a slight difference in their legal records. Here we are! OK: So we've got a boatload of traffic violations but you've also got a variety of fairly serious crimes in their legal records. So to put it in perspective, if a CEO has a record, the firm is more than twice as likely to perpetrate fraud. And the CEO is seven times more likely to be named for perpetrating fraud if that CEO has a record. And one of my favorite aspects of the research design is to look at the same firm at the same time who committed fraud, and look at the CEO and the CFO, whether each one has a legal record or not. And we asked: Which one was named for perpetrating the fraud: the CEO or the CFO? And it turns out it was the one who had a legal record, which is getting much closer to this causal relation that researchers try to identify. Now, the second example we look at is inside trading. Now as insiders, executives, we know they have private information and trading on it, if it's material, is illegal. Nevertheless, research suggests that on average, when executives buy shares in their company, the stock price performs abnormally well after that -- which is a hint of them buying shares when there's a favorable outlook for the company. Now trades have to report to the SEC within a couple of days and there are investment strategies, a lot of investors mimic the trades of the executives. So if executives are buying, they jump in, and there are various databases that report this information very quickly, enabling investors to do that kind of trading. So, we look at whether those patterns are more powerful if the executive actually has a legal record, meaning they might be more inclined to trade on material inside information. Here's what we find: In 180 days after executives buy shares, on average, if the executives -- and this is not just a CEO, this is all the Section 16 officers -- on average, there is a market adjusted or abnormal positive stock return of 7 1/2 percent, if those executives have no legal record at all. If they've got minor traffic violations, it's a bit higher. And if they have serious legal infractions in that record, it's higher still. So these guys have really an informative trait, if you were gonna try to make like executives, these are the guys to track. Now unlike sort of average -- where most studies don't find anything one way or the other after executives sell their shares -- we do for record holders. They appear to both buy and sell shares before good news and bad news, respectively, such as earnings announcements, mergers and acquisition announcements, or bankruptcy. And then we looked at whether good corporate governance is a deterrent to this behavior. And we find that it is, if the executive has minor traffic violations -- but it is not if they've got serious crimes. So it doesn't seem like good governance has any good effect on prohibiting this type of inside trading if the executive has serious crimes in their personal legal record. Now those are fairly obvious, the things to look at; let me look at the less obvious, whether or not the executive has a frugal lifestyle. And we picked this, in part, because psychology has identified it as a distinct psychological trait. Where in the lab they found if you're a frugal consumer, on average, you're relatively restrained in what you buy; you're efficient in how you use what you buy; you think long term; and you tend to be more concerned with other people and more concerned with the environment than consumers who are not frugal. So let's look: Really let that list sink in. If you're a frugal consumer, you're restrained in what you buy; you're efficient in using those resources; you think longer term; you have more concern with others and the environment. So we asked a simple question: If the CEO has a frugal lifestyle, is the firm more likely to be frugal? That is: Does the firm act restrained in the way they spend money, efficient in how they use their capital? Do they think more long term? And do they behave in a way that seems to express more concern for people and for the environment? So to identify frugality, if we say an executive is frugal, if he does not own expensive cars, boats, or homes. And if they do own one or more, we call them unfrugal. It's that simple what we do. And this is based on background checks that we've done. So now, let's go to our second and final poll of the day. And I'll turn it over to Maria to ask you what you think. Do you think if the CEO has a frugal lifestyle, do you think each of these five behaviors or outcomes will be high or low? OK: Well, in the interest of time, let's just take a look at that. So you guys are predicting restatements will be low; risk management will be high; bankruptcy will be low; acquisitions will be low; and corporate social responsibility will be high. This is exactly what we find. So we find -- the risk management, by the way, is done in banks. And we use an index developed by finance researchers that capture things like, is the chief risk officer one of the highest paid executives? Is there a committee of the board focused on risk only? How often do they meet? And so on. And that's rolled into an index, and the index is much higher if the CEO is frugal. And if you go to a frugal CEO, the index goes up. If you go away from a frugal CEO, the index goes down. Bankruptcy -- this is a pilot study so this isn't published yet, but what's fascinating here is we take the best publicly available bankruptcy prediction models that use a bunch of ratios for the financial statements and stock price data, which is more forward looking, and ask if you control for all of that... So two companies are identical on the basis of what the normal models say is the bankruptcy risk, is the unfrugal CEO more likely to have a firm that goes bankrupt? And the answer is yes, that bankruptcy is twice as high with an unfrugal CEO after controlling for known determinants of bankruptcy risk. Long-term focus, acquisitions are low, 'cause they're quick hits, and concern for others and the environment, high. That's what we find not only for aggregate but every aspect of social responsibility, which is tracked by the data. Diversity of their employees, the way they treat their employees overall, product safety, the way they treat the community, and the way they treat the environment. This is not only comparing one firm versus another; this is if firms go from an unfrugal to frugal, CSR scores go up. If they go from frugal to unfrugal, CSR scores go down. OK, so that's what we have found. So to summarize, we've looked at six steps in our approach to fundamental analysis and valuation, and we've highlighted the "CEO factor" that's a missing link in the more traditional approach: illustrating how executive style -- and for both, from their track record on a job and their off-the-job behavior -- can have important implications for behavior and performance of the firms they run. And when you combine those insights with your qualitative analysis of other aspects of our framework -- like comp and governance and industry strategy -- as well as rigorous analysis of the numbers, it can give you an edge: both in assessing performance of the firm and its risk, and in forecasting and valuation. So thanks all for your attention! And Kara, now I think we've got a little time for any questions they may have. I'll give it my best shot.

Kara: Yeah, I'll let you take a breath for a second and I'll read the first question. We'll get through as many as we can.

Abbie: OK!

Kara: So thank you for the presentation. "So how does the CEO's influence or 'the CEO factor' change if the CEO is not a dominant shareholder or the chairman of the board puts -- or excuse me, let me rephrase that -- change if the CEO is not a dominant shareholder or the chairman of the board, but is more of a professional CEO?"

Abbie: Yes, so that's a great question. I will tell you this: Our samples -- and we now have, depending on the study, it's anywhere from 250 up to 1,000 executives -- these tend to be the largest public companies, many of whom are simply professional managers. They're, you know, they own a tiny percentage of the overall stock, 'cause these are huge companies. They may or may not necessarily be chairmen of the board, and these are the average patterns. So this holds for the sort of more typical manager, not just the Jeff Bezos or Mark Zuckerbergs of the world. But that's a really interesting empirical question where you could go after, if you parse the data out and look at those executives, are the results, like, in the tail of the distribution? We haven't done that but I think it's a really neat idea. So thanks for the question.

Kara: Great, thank you! And how would you, shifting gears a little bit here, "How would you apply this thinking and framework in a startup environment where incentives may differ or financials are not readily available?"

Abbie: OK. So in a startup... This effect that we're looking at, we're always controlling on the right-hand side for various aspects of the governance and whatever. But we also see just simple correlations. In other words, mindset is mindset. Now I suspect entrepreneurs are more, I'm guessing, they tend to have more confidence. I know there's a ton of research on this but I think they have more confidence. They tend to be more bullish. They're probably open to risk taking, things like that. So they're, you know, there's research on whether there's kind of a type of entrepreneur. And so I'm not gonna speak to that as much as I'm gonna say whatever their type is, I would venture that you will see that type manifest in what the firm does.

Kara: Great, thank you. There are a couple questions under this theme of, is this framework applicable to private companies, such as family businesses, or private companies where the financials just aren't as readily available?

Abbie: That's again a great question. Naturally, we have no data to actually study that question. But given the fundamental underlying psychology research in the lab, for example, when it comes to frugality; and given the underlying psychology and criminology research, these are about humans. And so it's general, whether you're in a private company or whether you're in a public company. It's a mindset that I believe is gonna operate anywhere. In fact, one thing we'd like to consider doing is looking at political environment. Politicians, if you look at their lifestyle, would you see similar patterns in sort of their level of concern for others, their level of concern for the environment, their own insider trading, and things like that. I think it would be fascinating to go beyond the public company setting and then that's a case where we could get data. Whereas with private companies, we're really restricted. And by the way that's so sad because there's just enormous interest in that. One of my colleagues, Michael Minnis in our accounting faculty, has done a lot of research on private companies. So if you're interested in private company research, look up all things Mike Minnis. He's got terrific stuff.

Kara: Great, thank you. "Has there been any analysis into looking at CEO home life -- for example, divorce rates, number of children, family function, et cetera -- as a predictor of performance in a firm?"

Abbie: Not to my knowledge and to be honest, that was one of the things we originally started thinking about, is whether that's related to their value system and things like that. The roadblock we ran into, 'cause we're doing large sample analyses, is that the records on marriages and divorces were not really centralized in a database the same way we could get data from the background checks that we did. So at the time we were starting out, like five, six years ago -- and I don't know if this is still the case -- but they hadn't yet, you know, I don't know if it's county or state or where those records are, but it would've been really tough to get reliable data. I have, though, seen references to a paper that suggests that divorces are really distracting and may lead to inferior performance. But whether there's a separate effect of their value system and performance, I don't know.

Kara: That's interesting. OK, so Laura says: "Professor Abbie, thank you for such an engaging class. Can second-in-line executives have significant influence on an organization as the CEO does?"

Abbie: Well, they can certainly have a lot of influence. So in the original paper that I love so much by Marianne Bertrand and Antoinette Schoar, they looked at more than CEOs. So they were looking at sort of C-suite and finding the imprint of all of those executives as they move from firm to firm. So that tells me the answer is yes, that it's more than the CEO. In our own research we've done, looked at CEOs and CFOs. In particular, CFOs can definitely -- they're a player at the table and they can make a big difference. One thing I'd love to do -- but there's financial constraints 'cause these background checks are very expensive -- but I'd love to look at the lifestyles of the directors. Because directors can make a big difference as well. I've seen, you know, the mindset of a director come onto a board and the organization may learn from that and shift direction -- which is why I recommend when you look at a company, they've added a director, figure out their background 'cause it may foreshadow some changes. So I think that'd be a really neat extension as well. And literally, it's more about how expensive it would be to get the lifestyles of all directors of a huge set of public companies. These are fabulous questions, by the way!

Kara: Smart group!

Abbie: Absolutely!

Kara: All Booth, future Boothies. "If a CEO shows frugal mentality, does that mean the company is likely to take a more value or stable approach rather than a growth approach, which involves acquisitions and possibly riskier decisions?" I think you addressed that a little bit, but...

Abbie: Yeah, with definitely acquisitions. So the risk is a really important question and we're looking at that right now. The only thing we've looked at that that previously was in our paper on risk management. And there, we found the focus on risk management is much stronger if they're frugal and their tail risk was much reduced. So that, you know, when the banking industry would do badly, the banks that did the worst tended to be led by unfrugal CEOs. So they got in way more trouble in the financial crisis. It's pretty fascinating. One of my friends at Harvard was actually consulting with one of the big banks in New York, and his expertise is risk managing control systems. And he was working closely with a CEO to bring all of this into the bank. And then there was a change in CEO -- and the new CEO said, "Nah, we don't need that." And the new CEO had a way less frugal lifestyle. And then the financial crisis came and they got in really big trouble. So he was fascinated by, you know, hmm, you start thinking differently when you think about... And again, it's not every individual, but these are sort of average patterns. So anyways, what we found is: Frugal, less tail risk both on the downside and the upside. But recently we're looking across the board, at companies across industries, and we are not finding that they take less risk. In fact, often academics look at long-term research and development as one of the riskier investments. And that, in our pilot study, is looking like it may be higher among frugal CEOs. So they're really investing in long-run organic growth and the unfrugal CEOs are making the acquisitions. Their overall sales growth rates, we're not finding any difference -- but they get there differently. Acquisition for unfrugal and more R&D patent-like innovation for the frugal.

Kara: There's a few questions similar to this one that I'll read. So: "Very interesting insights on frugality. How were you able to pick this as a factor?" So a little interest in, how did you zero in on this, kind of backend work that went into picking the frugality factor?

Abbie: Yes. So I alluded to the prior psychology research in the lab but even before that, I was observing carefully a public company who had a change in CEO and the new CEO -- actually an alum of Booth -- had the most frugal lifestyle of a CEO I had ever seen. He, and I'm dating myself here, but he would clip coupons out of the newspaper to go to the grocery store. This is a Fortune 500 CEO doing this. And I thought, "What an extraordinarily frugal person!" And then I saw the changes he made at that company. And it was remarkable! You know, he brought in CFOs and people with accounting knowledge under the board. He put in deeper, better information systems, started digging down more deeply into understanding the numbers of all the different businesses, stronger controls, started really focusing on employee safety. And I was looking at this saying, "I wonder if this has anything to do with frugality?" So then I, you know, Google frugality and all this psychology research came up. And it's like, whoa! This might not be a one-off. This might actually be a pattern and in the lab, it suggests as consumers, there are these different tendencies toward behaviors. So that's what made us say, "OK, this is really interesting," because there's so much interest now in things like social responsibility, diversity, and treating employees fairly: and this is important stuff. And so, it just seemed like a really natural thing to look at -- and I'm pleased that when you all after, you know, 15-second summary of the psychology research came up with the same predictions we did. Which tells me that we're not, like, stretching things, that these are actually quite intuitive when you go outside the lab into the corporation. And one reason it's, you know, not known in advance is you know, you wonder does corporate governance -- whether it's the board, or incentive plans, or shareholder activists, whatever -- do they unwind or neutralize these differences in mindset? The answer is no. Now a question going forward with the increased interest everybody has in, for example, social responsibility: Will we see those pressures reduce the gap associated with the frugality/non-frugal? Does it make the non-frugal CEOs behave more socially responsible than they intrinsically did with this extrinsic pressure on their reputation, on their job, and so on? So I think that's an interesting question for future study as the world is changing now.

Kara: Yeah. And going back to earlier in the presentation, to the criminal backgrounds. So when you're looking at -- or legal backgrounds I should say, yeah, I guess criminal as well -- "When looking at the legal history how far back would be concerning? Is it like, you know, three years, seven, 15, 20?" And then also, just under that same umbrella of, you know: What about some things are sealed and that sort of thing when it comes to being able to find these offenses. So how did you address that and think about the timeframe?

Abbie: Yeah. So we picked an age -- and I'm blanking on whether it was, you know, it had to be after they were 20 or something so they couldn't be 13 and do something -- you know, we had a cutoff. But then it could be anytime, it could be six months ago, 10 months ago, you know, five years ago. And it didn't seem to really matter how long ago it was within that, within that timeframe.

Kara: Great. So this one's a little bit longer, so bear with me.

Abbie: Oh! The other one about what do you do when things are sealed or whatever?

Kara: Oh yes, sealed records, yes!

Abbie: Yes, yes, so this is all based on federal databases that have been centralized, so this is what is knowable. And if there's something that's missing out of that, that's not observable to us.

Kara: Mmmm hmmm. So it seems likely to the extent we've got a lot of noise in the data due to measurement error, that would likely make it harder for us to detect the pattern. But yeah, that's a potential issue.

Kara: Thank you. "When looking at a leader's track record, like Enrico's at PepsiCo, is there a timeframe that is most relevant? Do particular roles also provide a stronger signal than others for how they will perform in the C-suite role?" So think of those who moved up the ladder to the C-suite.

Abbie: Yeah that's, that's really interesting. You know, the PepsiCo example was particularly nice because of the segment reporting roles. And so the restaurant business that Enrico was appointed to run was defined as a reporting segment. So as outsiders, there's specific data you get on a segment-by-segment basis. And that allowed us to say capital spending -- which is one of the data items disclosed -- you could see it was lower, it was declining under his tenure, running that division. You could look at the profitability of the business and the management discussion and analysis in the 10-K talks about each of the segments. And so he was running a segment, which enabled us to figure out a lot about his style. So that's kind of an ideal scenario. The other ideal scenario is that they've been a CEO of this company for a while, and one of the things we'll do with FSA is go back in history and look, you know, how do they respond in a crisis? Do they tend to take risks? Do they use a lot of debt? So, you know, have they had reporting problems? So one of it'll just be the track record in the current job. And the best is if they're something like CEO. So there are other settings where it's just gonna, you're just not gonna have a heck of a lot of information. And this is one of the limitations of financial reporting. Investors always want additional disaggregate data than managers wanna provide. So it's that constant, we gotta use what we can find.

Kara: Yeah, absolutely. In your research, there are a few questions also around this trend, but I can lump the themes together here. We have quite a few questions. "In your research have you noticed any differences or trends for male versus female?" And then there were also questions other, you know, based on race, ethnicity, understanding that we know that C-level is not the most diverse right now, but have you noticed anything with the small samples that you would have of women, minorities, et cetera?

Abbie: Your comment is right on point. One of the major frustrations is, we basically have no diversity in our sample.

Kara: Yeah. Because these are historical big, public companies in the U.S. They're such small sample sizes of diverse C-suite executives and, and women that I, you know -- one of the advantages hopefully over the next two years -- besides the betterment of society and doing the right thing -- is researchers will actually be in a better position to really understand some of these issues better. I can just tell you anecdotally from my personal experience on boards, is that board diversity is really, really valuable because you get these really -- if you've got a diverse background or race, gender, whatever, you're coming to the table with some different experiences and perspectives that, you don't want groupthink in the C-suite and you don't want groupthink at the board level. And I can just tell you anecdotally that that kind of diversity is really valuable. You don't wanna get too falling in love with your business model. You always need to be -- it's sort of like Booth. Faculty are always challenging each other's ideas, both in each other's offices and we're challenging ideas in the classroom. Like always, always, always. So you wanna have that in the C-suite and you wanna have that at the board.

Kara: That's a perfect segue for what will probably be the last question about just that. So the question, a few questions about, like, "What's this class actually like in person, you know, lecture, is it interactive discussion?" And then feel free to, of course, bring in examples from your colleagues and how we actually present this Chicago Approach of business education to our current students -- and of course, the impact that has on alumni. So yeah: What does this look like in real life, I suppose?

Abbie: Yeah, great! Well first of all, one of the things I love about Booth, and I think students love about Booth, is they let faculty customize their teaching style to play to their strength and the subject matter: to deliver the best thing they can. So students always have a choice. You know, maybe it's gonna be case method. Maybe it's gonna be lecture. Maybe it's gonna be a flipped classroom. Maybe it's gonna be a lab class. There is more variety of teaching styles at Booth than anywhere I know. My own personal style is I lecture a lot but unlike today, it's an open, open forum. So I'm constantly walking around the room and students will say, "Abbie, what about this?" So they are invited to interrupt me at any time and it sort of got way less formality than this did. So the lecture is much more interactive and it's very applied. So as I alluded to earlier, each week they've got either a big individual or team assignment to apply the material for that week. And then a big portion of the class is going through those assignments and debating how they thought about things. So it's quite interactive in my class but the style is lecture. There are some classes that are sort of the Harvard Business School case method. So Steve Kaplan -- who's from Harvard, got his degree at Harvard -- he does sort of a Harvard Business School-style case method class, which is quite different from my approach.

Kara: OK, great, that's really helpful insight. And hopefully, hopefully in the next year or so we'll be able to have you invite you to campus for in-person classes but for now, I do wanna take the time to, of course, thank Professor Abbie. So thank you for your time and your insights today, and Maria and Jeff as well. Thank you so much for helping, you know, bring this class to life. For those of you, I apologize, we couldn't get to every question but do not hesitate to email us. I'm sure Abbie would be happy to follow up. You can always reach out to myself or Jeff, or anyone on the admissions teams as your starting point. And then we can help get all your questions answered. So thank you all again for joining us. Hope you all have a great day or evening, wherever you may be in the world. Thank you, guys!

Abbie: Thanks, everybody! Thank you!

Kara: Thank you. Thanks, Abbie.