Capital Allocation and Wealth Inequality
Featuring Abbas F. "Eddy" Zuaiter and Leo Hindery
Published on: August 30th, 2019 • Duration: 52 minutesAbbas F. “Eddy” Zuaiter, managing member of Zuaiter Capital Holdings and former COO of Soros Fund Management, interviews Leo Hindery, chairman and CEO of Trine Acquisition Corp. In this candid conversation, these two titans discuss the dynamic environment in contemporary media and how the incentives of public firms have caused a level of inequality unsurpassed in history. They also discuss the relative importance of shareholders and stakeholders when it comes to corporate decision-making. Filmed on August 14, 2019 in New York.
LEO HINDERY: You have concurrent responsibility to your employees, to your shareholders, to your customers, to the communities you live in, and to this country.
Massive amounts of money are being invested on the consumers' behalf, the viewers' behalf with no return going to the investor.
The average CEO in America today makes 300 or so times what his or her average employee makes. For a century, that number was 15 to 20 times.
ABBAS F. "EDDY" ZUAITER: Greetings, I'm Abbas "Eddy" Zuaiter, a Managing Member of Zuaiter Capital Holdings and a director for the Trine Acquisition Corp. Today, we're going to have, really, a free flowing session with an entrepreneur and operator, someone who's been Chairman and CEO of two public companies, ran a private equity business, and really has developed and created shareholder value. In fact, he's an epitome of someone who thinks of shareholder value and stakeholder value creation over the time.
You may ask, why would someone who's known to be a macro investor be talking with a CEO and operator, and really what I think there's this misconception about macro investing that it's all about trading bonds and currencies and dollars. Macro investing in essence is about big themes of having thematic views, and playing out big mega trends such as demographics, technology, evolution. And that's really what we're hopefully will be able to touch on in today's conversation.
Good afternoon, Leo. And thanks for joining us on Real Vision.
LEO HINDERY: No, my pleasure. This is going to be fun.
ABBAS F. "EDDY" ZUAITER: Let's try to get into it. But I realized this morning in preparing that maybe a lot of the Real Vision viewers may not know you, you're really- unlike a lot of the guests here, a lot of the guests here tend to be people that are investors, you really have run companies and been Chairman and CEO of two public companies. Maybe you could start a little bit by giving us a little bit of your background.
LEO HINDERY: My background is up in Washington State. I was raised in a very impoverished family up in Washington State where I did my college at Seattle University. And after I got out of the army, I went to Business School at Stanford, spent 10 magical years in the natural resource industry, merged that company into General Electric. And that transition, to me, just happenstantially into the media industry, where the balance of my career has been.
And I think there's some interesting aspects of where your career lands you. Having landed in media, well, the one thing you know is media loves to cover media. So whatever visibility I have has been purely a function of the industry that I fell into. And it's been just a wonderful run.
I started my own company after a number of years as a salaried employee in media. Ran that for a decade, merged it into TCI, became the chief executive of TCI and Liberty Media. And we merged into AT&T and I ran AT&T broadband for a while. And but a dozen years ago, I resurrected my investment company in media, of which you're a proud partner. And it's an industry that has probably Eddy involved more dramatically than any industry other than perhaps the finance industry, which are many of your own roots. And so you have two concurrent obligations. One is to run your assets well, but also to look ahead in an insightful sensitive fashion to an industry that just is changing under your feet every day.
ABBAS F. "EDDY" ZUAITER: I want to go back and just a couple questions, because I think leadership qualities are probably the most understated of a CEO of someone who runs a business, because you really are not only an allocator of assets, you're really someone who sets the vision and an allocator of people. Explain to me why did you go to the military? Tell us a little bit about that.
LEO HINDERY: Well, I was going to be drafted and I enlisted in the army. I didn't want to just be drafted. The war was on in Vietnam.
ABBAS F. "EDDY" ZUAITER: So you volunteered?
LEO HINDERY: I didn't go to Asia. I was given an intelligence position. And did my 2 years and then after that, went to Stanford Business School. But to the heart of your question, I wrote a book about this. I entitled it, It Takes a CEO. I think you're born to be a CEO. You can aspire and successfully attain other roles in industry. You can always work for somebody else.
But if you're going to be the CEO, it takes this particular skill set. And often, it's not a pervasive skill set. It doesn't always survive over extended periods of time. You overstay your welcome at some points. But you take a Winston Churchill, a checkered history prior to the Second World War, and clearly born for a moment in time to save us from fascism. And I feel that sometimes industry is the same way that the real fun for me has always been in the tricky situations, the ones that are profoundly challenging. I assume I'm supposed to run things well. That's a presumption that you have to make about yourself, that why in the world would you have these titles if you weren't by nature, a good operator.
But I think the point of your question is the one that intrigues me, which is it's not just being an operator, you have to have a vision. You have to advance thousands, in some cases, 10s of thousands of women and men to a common objective gladly. They want to be there of their own volition. You don't drag people into positions, you encourage them to aspire to greatness, and then you lead them there. And your role is to help them lead. Help them lead, not just your own leadership, but then also to see ahead.
ABBAS F. "EDDY" ZUAITER: Tell us a little bit about that vision, that leadership. So there was a great confluence of events where John Malone, the cable industry and you, and I remember you telling me that one of the things that you're most proud of is that you were able to really take a business that really wasn't functioning well, turn it into a great operating business without having to do significant layoffs.
LEO HINDERY: I've worked very hard to never lay off anybody except for cause. I don't believe that the women and men who run these companies are the problem. If there is a problem, it's the manager's problem. And TCI was quite distressed. This was February of 1997. And it was the largest cable company in the world with operating margins that were embarrassingly low. Lots of contretemps with attorneys general about some of our behaviors. We weren't doing very well. We were big, but we were doing very poorly.
And we initiated two initiatives at once. One was called the Summer of Love, which was a complete reordering of the entire US cable industry, about two/thirds to 70% of the cable systems, cable operators, cable subscribers in the United States, Eddy, changed hands in 2 years' time so that at the end of it, we own home markets so that we could compete with the satellite, compete with the phone company, compete with the public utility. While that was going on, I had a fiduciary responsibility to fix TCI. And that was hard.
We did it from the bottom up. We gave securities in the company to every employee, unionized or unorganized. And we just went to a common objective. And I was convinced that we could fix it. But if we had fixed it, if it turned out like I hoped it would, the beneficiaries of the fix would be the women and men who worked there. We had 67,000 employees and every one of them was a shareholder when I left. And they were the beneficiaries of these increases.
We had a 16% operating margin when I walked in the door, we had a 43% operating margin 2 years later, and never raised our rates in excessive inflation. Just before I had arrived, there had been a reduction in force, 10% of the workforce had been let go. I hired every one of those women and men back into the company, because it wasn't their fault. They were the hole in the dike. But the dike was poorly assembled, poorly constructed.
And so I think leadership is a strange very personal phenomenon. And I teach at some of the business schools still a course or so a year, at bigger business schools. And some of these women and men are not born to be the CEO. You look at it, the class and they're all profoundly bright. But only a handful of them are supposed to be the boss. And that doesn't diminish the other careers. I think there are great accountants, there're great marketing executives. There're great operations executives. But there's a handful of women and men who are qualified to be the CEO.
ABBAS F. "EDDY" ZUAITER: This is a terrific story. And by the way, full disclosure, Leo, you made me money before I ever met you because I was a proud shareholder of TCI.
LEO HINDERY: I don't think we'd be sitting here today if you've gone the other way.
ABBAS F. "EDDY" ZUAITER: But, no, it's an incredible story, a case study that's been written about it and I'm not saying anything, it's obvious about how you were able to create shareholder return and stakeholder return at the same time that the company, by making profits for the shareholders, didn't leave people behind. Actually, you enriched everyone in the process of value creation there.
LEO HINDERY: I take somewhat credit for that outcome. I don't take credit for the impetus to the outcome. When I left Stanford, I had 10 magical years working for a gentleman named Edwin Littlefield, who was one of the great, great corporate titans of an era. And his close partner was Reginald Jones, then CEO of General Electric, as I said, is a digression. Ultimately, our company merged into GE. So I knew both of these men really well. I worked for them for over a decade.
And they were the ones who told me that shareholder- only Adam Smith and Milton Friedman approaches to your results. It's just being selfish. Firstly, it was wrong. IRU is almost to the point of being immoral. But it didn't work. You have concurrent responsibility to your employees, to your shareholders, to your customers, to the communities you live in, and to this country. And they're concurrent and equal, you don't get to pick one and say, I'm going to only concentrate on the shareholders and ignore the interest of my employees or the town we work in, operating in or the nation we have the privilege of living in.
And so I stayed in Business School 10 years longer than my classmates. I went to work for these marvelous individuals. It was just magical. And when it was over with them and they retired, and I moved into the media industry, as I said, happenstantially, I had a foundation that stood me in really good stead. When it was my turn to be a CEO, I think I knew how to do it well.
ABBAS F. "EDDY" ZUAITER: That brings us to the next step. You had a successful career running TCI, merged it and then eventually sold it into AT&T, go back to in private equity investing, building and operating companies into media, which is really what you've been passionate about. And then the YES Network, talk to us a little bit about how that came up. And why you found that to be an intriguing, challenging opportunity for you.
LEO HINDERY: Well, the YES Network is the television home of the New York Yankees, serves roughly eight and a half million households in this Northeast Corridor. And for a variety of historical and not very good reasons. It had been left out of what's called the regional sports network environment. So Major League professional sports all over the country and their domiciled city were setting up these regional sports networks, I was doing it. Our company TCI is the architect of the original regional sports networks.
And for a variety of reasons, not very good as I said, New York was left out of it. And so I had the privilege of meeting George Steinbrenner. Not an easy person. But I came to him. And I said, I think I know what I'm doing here. You've got a hole to fill. And let us create this network for you called the YES Network. And it's now with no close second, the largest, most profitable, regional sports network ever created in the world.
And if you're a Yankees fan, as many of the women and men who might be listening today are, there's a television home that is uniquely that of the Yankees. And that's a nice thing. It comes back to my comment that I think you have concurrent responsibility to the community, to the employees, to the investors and in the largest sense, the nation. Well, we hit three of those. We brought something of great value to this region, to this community. We did it with just some magical work by the women and men who were the first employees of YES. It was just fun.
These were the most creative, younger people that I'd ever encountered in my career in mass. And we started this thing from scratch. And we announced it on the day before 9/11, September 10th, 2001. And we had to go on the air 4 months later, in March, with the opening of the new baseball season, and we had nothing. Our beloved city was a wreck. The industry was being challenged. And yet we had to do it.
And so I had this privilege of hiring these great women and men who were the best of the best because it was the Yankees. So they wanted to work there. I had developed some reputation for being somebody that you might want to work for. And we gave the community something special. We gave the women and men who built it something special. And then we gave the investors a great return on their investment.
ABBAS F. "EDDY" ZUAITER: But just tell me- this was again, a terrific success story. And you seem to have been at the confluence, you saw the opportunity to monetize sports franchises, partially because of your experience at TCI. But really, you're a little bit ahead of the curve of what actually a sport franchise can look like. Now, we have Manchester United, we have really the globalization of sport franchises that's unique. This morning, Joe Ty from Ali Baba paid $2.35 billion for the Nets. What was it? The Steinbrenner Group could have figured that out. What is that you saw, maybe your vision that they didn't necessarily see?
LEO HINDERY: Part of the reason it didn't happen earlier with the Yankees is there is some cantankerous personalities that were working headwinds against it. It does go back to the fact that these teams are community assets. It's the rare woman or man who's a fan of baseball. They're a fan of Yankees baseball, or Cleveland Indians baseball or Denver Rockies baseball.
ABBAS F. "EDDY" ZUAITER: Again, the concept of the stakeholder versus the owner.
LEO HINDERY: And there are only a handful of sports franchises that are truly transcended. Manchester United, which you mentioned, is one of them. AC Milan is another. The Yankees fall into that category. The New England Patriots because of Tom Brady have gotten to that level. So we had an outlier. The City of New York was not getting what others, much smaller, somewhat less vibrant media cities were getting. There was an RSN in Cleveland, Ohio, for the Cleveland Indians. But here you had the New York Yankees, and no regional sports networks.
Well, these young men play 162 games a year. And we committed to putting every one of them on television, every one of them live on television for the entirety of the season. And if you're a Mets fan, you go, well, why do I care about that? But if you're a Yankees fan, that was a real gift. And so one of the great fun things is after I started YES, I helped Fred Wilpon, who owns the Mets think through the starting of what became the Mets Sports Network, SNY.
And it comes back to your earlier comment, which I so appreciate, which is the presumption that you can run this stuff well is absolute, maybe I wasn't the person to run YES, maybe you were that person, maybe you would have done a better job. But you have to couple your operating skills with your vision. You're being paid as a CEO to see things before other people see them, react better to the impending changes than other people might, and never lose sight of those five concurrent responsibilities that you have.
ABBAS F. "EDDY" ZUAITER: We've talked now a lot about your loaded history. You were early on in the catalysts and the consolidation and what the telecom, the cable sector, you then spend really time creating tremendous value in the media element through the broadcast network and the development of this sport franchise assets. And through all of that, obviously, technology enabled a lot of that. As