The Prof G Pod with Scott Galloway - Office Hours: Income Inequality, Executive MBAs, ESG, and the Future of Smart Homes

Episode Date: May 3, 2021

Scott answers a question about where the smart home industry is headed now that nearly half of American households use a smart home product. Scott also shares his thoughts on how companies can expedite environmental, social and corporate governance, how to know if you’ve progressed beyond the need for an executive MBA, and the correlation between income inequality and companies that achieve “unicorn” status. Have a question for Scott? Email a voice recording to [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the Prop G Show's Office Hours on Monday. This is the part of the show where we answer your questions about the business world, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehoursatprofgmedia.com. Again, that's officehoursatprofgmedia.com. First question. Hi, Prof G. I'm walking through the city of Melbourne listening to your podcasts. Huge fan of the show, so keep it going. My name is Matthias, and my question for you is, where do you see the smart home industry going?

What do you think is interesting? What do you think is interesting? What do you think is bullshit? And what can smaller brands, so not Google, not Amazon, but smaller brands, what can they really do to innovate or grow? What's your take on smart home? Matthias from Melbourne, aren't you a saucy international global citizen? I think Matthias is a German name. I worked, one of my biggest clients was Audi in the 90s with Profit Brand Strategy. And I kid you not, I used to commute from San Francisco to Ingolstadt, Germany when the CMO would get some crazy idea that he wanted me to listen to in his office. And I would fly to Munich overnight, which takes about four days from San Francisco and then get in a rental car. Had to be an Audi, had to be an Audi and then drive to what is one of the most unfortunate

places on earth, Ingolstadt, Germany. And that was rough. By the way, I was really good on my first marriage, see above first marriage, commuting to Germany every other week. Anyways, don't know how I got there. Don't know how I got there. Okay. Simply put the smart home. I think it's really exciting. I think if you think about the only place in your life that you don't have your iPhone or your Android phone literally attached to your person is in the home. So the opportunity for voice and the opportunity to try and connect everything, everything from your refrigerator to, I have an app on my phone that turns on my jacuzzi. By the way, I hate that word. That's literally like, it's kind of synonymous with white privilege. Hey, me and the jacuzzi. Hey, I have white

privilege. But anyways, I have an app that turns it on and off and I can heat it before I get home. Not that I would ever do that, but it feels like almost every component that's connected to electricity will soon be connected to the internet. I didn't buy into the internet of things, big argument. I never thought, okay, your blender doesn't need to speak to the internet, but your thermostat, your sound system, your pool, a lot of your appliances will probably, the lighting will probably be part of this whole smart trend movement. I think voice, quite frankly, is where it's all going. And I think that your screen, if you will, won't be a screen, it'll be voice. And then the smart, will the TV control it or will voice? It seems to me the innovation around the TV is a lot less robust. That fucking remote

is still a shit show versus voice. I think the opportunity in the home is actually around non-tech. So Sub-Zero would be a great company to own. Viking, Wolf, there just aren't that many. When you think about, it's going to blow my mind, and I hope it blows yours. We have the GDP of Switzerland or Japan, depending on how much revenue follows time out of commercial real estate offices into residential. And people are just going to spend a ton more money on their home. And think about it, there really aren't that many great brands in the home. So what do we have? Restoration hardware is up 40%. I think Williamson was doubled since the pandemic began with

Pottery Barn and West Elm brands, Best Buy is doing well. Any chance to spend money in the home, great brands around furniture, flooring, home builders, supply chain around getting materials to home builders. I just think you're going to see so much more money spent in the home. I think you could raise a fund just on home and say, all right, everything from heaters to generators. I'm thinking about buying a generator, right? For some reason, that makes me feel responsible, almost like buying insurance. I live in Florida. We're on a regular basis. We have a hurricane and you lose power. And I'm like, well, I'm going to be one of those guys like, thank God we got the generator. But I think the home is kind of what I'll call small tech or dumb tech in home is going to be really powerful. But I do think the nervous system is going to be the traditional players. Maybe not Google and Apple, but it seems to me Amazon with voice is kind of the player to bet on. to do these sophisticated sound systems with these ridiculously stupid interfaces like,

I forget what it says, something Control 4 or Kronos, all this bullshit. And then some guy in a van would come and connect it all for a ridiculous amount of money such that it would break every two weeks and I'd have to call him and he'd come out and point fingers at his technology and have to pay this person more. And finally I said, fuck that. Get all of that shit out of here. I'm done. I'm done. And what do I have now? I have Alexa powered Sonos. I love Sonos as a brand. I love their products. By the way, I don't own stock. I do own stock in Amazon though. And I just put in some great Sonos speakers. I'm going to use voice to command. I say, Alexa, play Calvin Harris radio. That's how the dog rolls. That's how the dog rolls. Occasionally on weekends, I play Tom Petty radio.

According to Statista, U.S. household penetration, as in the number of homes using a smart home product will be 40% in this year and is expected to hit almost 60% by 2025. So the question is who benefits from that? I think the most revolutionary technology in the next 10 years and the most important technology in the next 10 years, everyone talks about AI, everyone talks about cloud. I think in terms of consumer facing technology, I think it's going to be voice. If you look at the number of people that Amazon is hiring around voice, it is staggering. Supposedly, there are more open job positions in voice at Amazon than at all of Google. Oh my God. Oh my God. Does that

blow your mind? That blows my mind. Okay. Anyways, thanks for the question, Matthias from Melbourne. Love Melbourne. Sydney, overrated? Well, it'd be impossible to overrate Sydney. Sydney is an incredible Sydney, but Melbourne underrated. Melbourne is arguably neck and neck with Sydney for best city in Australia for different reasons. But when I went to Australia, Sydney met my expectations. Spectacular city, incredible people. I'd say other than Miami, well, maybe Rio. That kind of urban setting on that sort of raw natural beauty. Wow. Wow. I mean, if it wasn't so far, we'd all live there, right? Anyways, but Melbourne has a certain charm, certain substance, certain, I don't know, just a certain kind of almost like, I don't call

it San Francisco vibe because yeah, San Francisco vibe minus the VC douchebags and self-importance and fog. There you go. Melbourne, Melbourne, San Francisco, but less shitty. Anyways, thanks for the question. Question number two. Hi, Prof G. This is Daphne from the deals group at PwC in Canada. I'm 26 and in the valuations practice. There's one topic that I was hoping you could speak more about.

That is ESG, environmental, social, and corporate governance. It has started to become clear in valuations that those companies which focus and invest in ESG have access to lower costs of capital and earn higher returns from the market. ESG can no longer be ignored when projecting a company's future value. Even with this, it seems to be that ESG and sustainability isn't being taken seriously enough. I and many others of my generation are feeling helpless, thinking that at the end of the day, those people with power aren't acting quickly enough. Would you please share your thoughts on how we can expedite ESG and sustainability practices?

Thanks for the question, Daphne. So ESG, I think the thing that's moving the needle on ESG is I've been shocked. I mean, just blown away by the investment appetite for things like climate funds. TPG is raising, I think, a $5 billion climate fund. And I'm just shocked at the level of ESG funds, distinct funds, and also how responsible investing, diversity and inclusion, the level of ESG component have been injected as a criteria for investment decisions. Everybody wants to know your ESG strategy or climate strategy. And something I wasn't really expecting this, section four of my online education startup, I thought, okay, we have a mission here and a purpose and I'm

going to be helpful recruiting people, something to rally behind. I think what we're doing has a nice social component, but that's not why I started it. I started it because I'm a capitalist, but I've been shocked at how much capital it has found our company or are drawn to it because it can be part of their ESG portfolio and that is trying to democratize or make education more affordable. The thing that's moving the needle here is that investors, specifically institutional investors, are asking these questions. They want to know how diverse your board is. They want to know your climate strategy. They want to know your carbon footprint. Just questions that everybody would have pretended to care about even just 10 years ago, but no one really factored into their investment decisions. Anyways, Daphne from Canada, I think

that we're seeing a tangible change in the behavior of companies because their investors are demanding it. And what's strange is that if you look at the world of investments, there's like 12 companies that control, three companies, State Street, BlackRock, and Vanguard are the largest shareholders in 90% of the Fortune 500, which is really interesting. And if they pick up ESG, then it's just going to happen. And I think they are slowly, but surely, or maybe not even that slowly, kind of speedily and surely. That presents some dangers because we could end up with corporate governance that is totally inert. You could have a room full of people to basically decide how corporations behave, and I don't think that's healthy. But one thing you see across the most powerful investors,

the largest investors, is a dramatic increase in their desire for ESG. Daphne from Canada. Daphne from Canada. If you're in Melbourne, I want you to look up my good friend, Matthias. We have one quick break before our final two questions. Stay with us. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals,

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Welcome back. Question number three. Hi, Scott. Nicholas here, formerly of Southern California, now in Colorado. I've been working in construction for 20 years. I do not have a college degree, but I now am making in excess of $200,000 a year every year and have been for quite some time now. I'm a husband. I've got three kids, the oldest being in high school. I did start young.

I'm at a point now where I could either go out on my own or I want to create more value for upward momentum at my current employer or somewhere else. And I've been looking at executive MBA programs that do not require a four-year degree because I don't have one. My questions for you are, would you look at an EMBA as a major positive for someone like me that has a lot of experience in a specific industry looking to make a move? Would that slide up the application stack? If you had someone working for you currently that has a lot of experience but lacked that formal education and they went out and got an EMBA, would you then look at them as someone that wants to grow and potentially bring them on for bigger challenges? Nicholas from Colorado, formerly of California, now to Colorado,

which I think is a move a lot of people are making. I love Colorado. I think if I were a brand or if there's a, I think the best brand in states is Colorado. Anyways, look, boss, I think you've blown by a need for an MBA. If you're making $200,000 a year in construction, it's clear you're very good at what you do. It's also, it sounds like they like you where you are. And so the decision to go to graduate school, it used to be an obvious one. When I went to graduate school, it was like if you got in, you went because it costs nothing or next to nothing. And the pop you got once you had an MBA was huge. One, the cost has gone way up and the pop has come down for second tier schools. And you're not going to get a pop because you're already making more than the average graduate of Harvard Business School.

So unless... Now there's some situational, there's some nuance here. And that is if your employer is excited about it and you go to them and say, I'm thinking of getting an executive MBA. And they say, we'd love that and we'd like to pay for it. And you get into a top 20 school. MBAs, unfortunately, I think are very brand dependent. I think an MBA from Wharton is an entirely different story than an MBA from a second tier school. I don't know. I don't even want to... I always hear from the people I say are second tier schools and they get angry at me and say, you're not helping and how can you do this to us? But the bottom line is if you look at the top 20, that's just a different certification. And what you're looking for, it sounds like, is certification or something that signals your success, your upward mobility, your potential.

And it sounds to me like you're kind of tracking. So unless your employer has said, it's really important to us and they're willing to pay for it, and that's how you register whether it is really important to them. And you get into a great program. Unless you have both those boxes checked, I would stay put and keep killing it. I would say reinvest that time in your career and in your family. So anyways, I don't think you are a prime candidate for an MBA unless someone else is going to pay for it and you get into a top 20 program. I think you should just keep on keeping on. Thanks for the question, Nicholas. Question number four. Hey, Prof G. This is Nealon from New York. First time caller, long time listener. I'm curious for

your thoughts on wealth and income inequality and the resulting impact on the cost of capital. Wealthier people don't spend as much of their income as lower-income people, and as a result, save and invest their excess earnings. When the inequality is more extreme, as it is now, that means there's a lot more capital-chasing opportunities, thereby reducing the cost of capital for businesses. Could this probably be a reason for why so many unicorns like WeWork have been able to form in recent years at large valuations? Thoughtful question, and absolutely yes. A record 225 US companies became unicorns in 2020. By January 2021, saw the greatest total in venture investments in history with $40 billion invested. And since the beginning of the year, over 60 additional private companies have achieved unicorn status, which speaks to your notion that there's just more investment capital out there.

As a matter of fact, Biden's proposal to do away with the capital gains tax deduction, which basically if you hold an investment or an asset for longer than a year, you pay 22.8% versus income, current income, what your sweat makes, what you get paid for, your salary can be taxed as high as I think 39%. That makes sense to me. We initially gave capital a tax deduction or the capital makes a tax deduction because we wanted to invite more investment capital into the ecosystem for growth. That problem is solved. If you have a pulse, you can raise a decent amount of capital right now, which will insult a lot of entrepreneurs who haven't been able to raise capital. But

if you're in the right ecosystem with the right profile, there's just never been as much capital, a higher valuation. And more specifically, the fact that the wealthy have been paying a lower tax rate because they get the majority of their income from asset appreciation, which is taxed at a lower rate, which creates more wealth for the wealthy. What do the wealthy do? They don't spend it. They save it or investment, which again creates this more and more upward kind of explosive nitroglycerin effect where we have more and more investment capital because the investors or the investor class gets wealthier, which means they invest more, which means we have asset price inflation, which makes it harder for the young to buy Amazon stock or to buy a house because everything is just exploded in value.

At the same time time their salaries have stayed really low. So the war between capital and labor, there's always a healthy tension there, but capital has been kicking the shit out of labor for the last 30 years. And now one analysis by senior managing director of Blackstone found that the number of listed companies had decreased 39% in the past 25 years while market cap had increased by 500%, which speaks to the concentration of power. Fewer companies, six times the value, that means probably the average company that survived is up eightfold. So it's great to be part of the shareholder class right now. According to the Economic Policy Institute, CEO take-home pay grew by 1200%, that's 13 fold from 1978 to 2019, a 41 year period. That's more than

the S&P stock market growth at 741%. So 14X versus kind of 8X. Meanwhile, compensation of the typical worker grew by just 13%. I mean, Jesus Christ. Let me tell you how CEO compensation explodes. I've been on the comp committee of several public companies and comp committee basically decides what the CEO gets paid. And we get a report from consultants because we don't like to do any work ourselves. And they say, okay, and we pay this consulting firm, I don't know, 200 grand a year or whatever it is. And it's all a racket. And they say, okay, you're on the board of the New York Times company. The New York Times is a media company doing $2 billion a year in revenue. On average, they pay the CEO between $6 and $8 million a year at the

50% level. And we go, well, we really like the CEO. They're nice. And you get to know them and you establish friends with them. And most CEOs, a key component or a key attribute of being a CEO is that you were the social chairman for your fraternity or sorority. You're really likable. It is very hard to become a CEO unless you're really likable. So you really like this person and they're trying hard. And so you think, okay, whether the company's done really well, not so well, less than average, you want to pay them not the 50% level, because that would just be like saying you're an average guy or gal. You want to pay them at the 60%. But here's the thing. When you pay 60%, you're essentially taking the number, say zero would

be paying the 0% and two would be paying at the 100% level in terms of disparity around compensation. If you pay them at the 60% level, you're basically saying 1.2 times 1.2 times 1.2 every year. And it explodes exponentially, CO compensation, because no one wants to say, well, they're a really nice person. But let's be honest, this firm hasn't performed as well as it could have, so we're going to pay them at 40%. No one ever does that. They either fire them and bring in a new guy or gal that they pay more than the 50%, or they pay that person above the 50%. The result has been just an explosion in CO compensation. And then to add nitro to the glycerin, the taxes those people pay is a lower tax rate than their employees.

And then the nitro or the fertilizer on top of the nitro glycerin or the C4, I'm trying to think of every combustible or explosive I can come up with, is that we have a situation where because of moral hazard, because the government is willing to bail out companies if they really fuck up or if a pandemic hits, then they take additional risk. And who knows, maybe you're a cruise company, maybe you're the CEO of MGM Hotels and your stock gets crushed because of COVID. You pile all the expenses, all the bad news into one thing, the stock goes down 90%, but it's not your fault, right? And then what do you do? You go to your board and say, hey, I'm in it to win it. I'm going to get us out of this, but I want more options. The board says, yeah, we don't want to rock the boat right

now. And we issue them a shit ton of equity and then the stock recovers. And the highest paid CEOs in America right now are the CEOs of companies that almost went out of business, but the government was there as a backstop. So we're creating moral hazard. We're creating too much risk. We're creating too much short-termism. I believe that compensation should be based on performance of the stock over the last five years. I also think there should be clawbacks. You see a lot of CEOs who leave and then all of a sudden, boom, a bunch of shit comes out, the stock crashes and they've pieced out to Texas or Florida where they get an even lower tax rate. So CO compensation is ground zero for income inequality. The inflation of assets or low interest rates and lower

taxes on the wealthy has created this exponential upward spiral of income at the top 1%, which has created dramatic income inequality. And a lot of people will say, well, they're our most productive citizens. Well, okay, sort of, but they've registered incredible gains. We're not talking about class warfare here. We're talking about an attack on the ballast of any democracy, and that is the middle class. By any measure, the middle class has been kicked in the nuts over and over. And then we say, okay, well, okay, it's the natural way of the world in a processing driven network economy where strength is begets strength. No, it doesn't want bullshit. We have consciously decided that the top 1% should pay a lower tax rate. And as of a couple of years ago, the top 1% pays the lowest tax rate. What the actual fuck? A couple questions. Do you believe a middle class is key

to a democracy? And if the answer is yes, then the next question would be, all right, does it make sense to have a progressive tax structure where if you're smart, lucky, talented, and you're just killing it and you increase your taxes by or you increase your net worth by the GDP of Hungary, which one man has done, Elon Musk. Elon Musk and Jeff Bezos now control more wealth in almost the bottom half of America. Is that capitalism? Is that capitalism? So look, let me use the R word and that's redistribution. And it's not even redistribution of capital or income. We've always done that. Let's use, I don't know, the E word, empathy. Let's use the B word, ballast. Let's use the M word, middle class. If we don't have

a robust middle class, we're not going to have a functioning society very long. Why is China threatening us as the superpower? Because they're adding tens if not hundreds of million people to, guess what? The middle class. Why is our power and influence around the world declining? Because we are attacking the ballast of any society, and that is the middle class. So we need some seeds to germinate from fire. We need to let assets fall to the natural level. We can't just keep bailing out the rich and the 1%. Thank you for the question. Thank you for your questions. That's all for this episode.

Again, if you'd like to submit one, please email a voice recording to officehours at propgmedia.com. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our assistant producer. Assistant producer, we're growing an empire here.

Microsoft, watch the fuck out. Amazon, they're nervous. They're nervous. If you like what you heard, please follow, download, and subscribe. Thank you for listening to The Prof G Show from the Vox Media Podcast Network. We'll catch you on Thursday. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence.

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