The Gospel reading last Sunday was Matthew 25:31-46, which is the Parable of the Sheep and the Goats, in which Jesus tells us that:
When the Son of Man comes in his glory, and all the angels with him, he will sit on his glorious throne. All the nations will be gathered before him, and he will separate the people one from another as a shepherd separates the sheep from the goats. He will put the sheep on his right and the goats on his left.
“Then the King will say to those on his right, ‘Come, you who are blessed by my Father; take your inheritance, the kingdom prepared for you since the creation of the world."
“Then he will say to those on his left, ‘Depart from me, you who are cursed, into the eternal fireprepared for the devil and his angels."
I was reminded of that parable this morning when I read the WSJ's article on activist investors. There are sheep hedge funds whose managers help corporations solve problems and enhance value. Oddly, and to my confessed disbelief, in at least one case cited by the article Carl Icahn seems to be one of the sheep. As Terry Pratchett's Discworld characters might say, "a leopard can't change his shorts." But maybe this is the exception that proves the rule that you wouldn't want Icahn running a business (see, e.g., TWA).
In contrast, Sardar Biglari is painted as one of the goats:
Her first day on the job, Sardar Biglari, owner of about 9% of the company at the time, notified Cracker Barrel he would fight for board seats. He argued that his experience turning around burger chain Steak ’n Shake would make him a strong board member. Investor adviser Glass Lewis & Co. agreed he deserved a spot.
Executives stood firm against him. Ms. Cochran and finance chief Lawrence Hyatt hit the road for several weeks ahead of the shareholder vote, meeting investors and proxy advisers to promote her plan and warn against jeopardizing early results. She said there already were new board members and that Mr. Biglari was solely bent on taking control.
Ms. Cochran prevailed, keeping Mr. Biglari off the board. But unlike many activists, he didn’t go away after the loss. He soon doubled his stake to nearly 20% and went on to pursue three more campaigns aimed at forcing board change. He has repeatedly criticized Ms. Cochran’s strategy and pressed for moves such as opening restaurants abroad and selling real estate, advice she rejected.
Her battles with Mr. Biglari have made headlines in Tennessee, where the company is based, prompting discussion among parents on the sidelines of her children’s lacrosse games. One day, her son came home from high school with inquiries of his own: Mr. Biglari’s campaign was the subject of his economics class.
Throughout the conflict, Ms. Cochran has stuck to what advisers say is one of the best defenses: a clearly defined and well-articulated strategy. She keeps talk of Mr. Biglari to a minimum in meetings with executives, one of whom has a Google Alert for the activist to keep tabs on what he does outside Cracker Barrel. “I work very hard to keep it from distracting the management team,” she says.
Meanwhile, some of Mr. Biglari’s actions alienated executives and board members. He uses sharp language and often hangs up on them, according to people familiar with the calls. And his holding company recently bought the publisher of racy men’s magazine Maxim, raising eyebrows at Cracker Barrel, which doesn’t serve alcohol and strives to project a folksy, family-friendly image. ...
This spring, Mr. Biglari called a special meeting to try to force a sale and suggested he would like to buy Cracker Barrel—after saying for years he wasn’t interested in doing so. Investors, already well-versed in the arguments, told Ms. Cochran and Mr. Hyatt there was no need to meet with them in person to make their case.
Glass Lewis, which hadn’t backed Mr. Biglari since his first push for board seats, delivered particularly harsh words this time. “Biglari asserts in its primary proxy filing that the incumbent board is ‘out of touch with reality,’ a sweeping and perplexing conclusion we find grates coarsely against the sobering realities of Biglari’s own success,” the proxy adviser wrote.
At the special meeting, in April, 93% of shares that voted, excluding Mr. Biglari’s, rejected his motions.
Unlike proponents of shareholder activism, I recognize that not all hedge fund interventions are created equal. In my essay Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415, I argued that:
Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This chapter proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
It's time to start implementing those proposals so that we can start sorting the sheep from the goats.
