1 00:00:00,120 --> 00:00:03,400 Speaker 1: This is a closer look with Arthur Lebbott. Arthur Lebbott 2 00:00:03,440 --> 00:00:05,600 Speaker 1: is a former Chairman of the U S Securities and 3 00:00:05,720 --> 00:00:09,160 Speaker 1: Exchange Commission, a Bloomberg LP board member, and a senior 4 00:00:09,240 --> 00:00:14,640 Speaker 1: adviser to the Promontory Financial Group. Jeff Graham is a 5 00:00:14,680 --> 00:00:19,640 Speaker 1: managing director at Bandera Partners of Value Oriented Hedge Fund. 6 00:00:20,520 --> 00:00:24,840 Speaker 1: He's an adjunct professor at Columbia Business School, and he 7 00:00:24,880 --> 00:00:30,520 Speaker 1: has just published his first book, Dear Chairman, Boardroom Battles 8 00:00:30,520 --> 00:00:35,360 Speaker 1: and the Rise of Shareholder Activism. Dear Chairman uses a 9 00:00:35,479 --> 00:00:39,600 Speaker 1: number of key case studies from the nineteen twenties to today, 10 00:00:40,240 --> 00:00:44,640 Speaker 1: and never before seen letters from Wall Street icons to 11 00:00:44,680 --> 00:00:50,120 Speaker 1: give an account of the history of shareholder activism. This 12 00:00:50,200 --> 00:00:55,200 Speaker 1: book provides a thorough and much needed understanding of the 13 00:00:55,280 --> 00:01:02,800 Speaker 1: public company shareholder relationship for investors, managers, and everyone concerned 14 00:01:03,200 --> 00:01:07,480 Speaker 1: with the future of capitalism. It joins me now for 15 00:01:07,600 --> 00:01:12,039 Speaker 1: a closer look. Jeff, You've said that you've always had 16 00:01:12,040 --> 00:01:15,040 Speaker 1: a passion for writing, and I thought that one day 17 00:01:15,120 --> 00:01:18,920 Speaker 1: you write a book. How did you decide that shareholder 18 00:01:18,959 --> 00:01:23,440 Speaker 1: activism would be the main topic of that book. Well, 19 00:01:23,480 --> 00:01:26,040 Speaker 1: I've always had a collection of of these kind of 20 00:01:26,120 --> 00:01:29,720 Speaker 1: angry d letters that were very much in vogue in 21 00:01:29,760 --> 00:01:31,640 Speaker 1: the mid two thousands when I began in the in 22 00:01:31,680 --> 00:01:34,959 Speaker 1: the hedge fund industry, and I thought I would collect 23 00:01:35,000 --> 00:01:39,320 Speaker 1: them into a reference manual of sorts and and and 24 00:01:39,520 --> 00:01:43,360 Speaker 1: that idea evolved into more of a narrative history. And 25 00:01:44,040 --> 00:01:46,959 Speaker 1: you know, it's about a shareholder activism, but it's also 26 00:01:47,800 --> 00:01:51,320 Speaker 1: a history of the public company. It's it's also a 27 00:01:51,400 --> 00:01:54,440 Speaker 1: general business history for companies like a you know, GM 28 00:01:54,480 --> 00:02:01,680 Speaker 1: and American Express. The letters are incredibly interesting and I 29 00:02:01,720 --> 00:02:05,080 Speaker 1: don't know where you dug them up. And I'm really 30 00:02:05,200 --> 00:02:11,920 Speaker 1: curious about very first, dear chairman letter that an active 31 00:02:11,960 --> 00:02:18,359 Speaker 1: has set. Uh, how did we start the tradition of 32 00:02:18,720 --> 00:02:22,480 Speaker 1: letters sending? Well? I mean, back then that was just 33 00:02:22,760 --> 00:02:27,959 Speaker 1: the way to communicate. And that was Benjamin Graham. He 34 00:02:28,160 --> 00:02:31,960 Speaker 1: was invested in the Northern Pipeline Company and he figured 35 00:02:31,960 --> 00:02:36,000 Speaker 1: out that they had this huge balance of bonds that 36 00:02:36,120 --> 00:02:38,960 Speaker 1: they were hoarding, and as a shareholder, he was trying 37 00:02:39,000 --> 00:02:43,799 Speaker 1: to compel them to distribute those bonds to the shareholders. 38 00:02:43,880 --> 00:02:47,080 Speaker 1: And so he wrote that letter to the the Rockefellers 39 00:02:47,120 --> 00:02:50,880 Speaker 1: who controlled the Northern Pipeline Company. Now I know that 40 00:02:51,000 --> 00:02:56,679 Speaker 1: Warren Buffett was a great fan of Benjamin Grahams and 41 00:02:56,800 --> 00:03:02,799 Speaker 1: certainly he's brought letter writing to probably the highest and 42 00:03:03,000 --> 00:03:09,480 Speaker 1: most persuasive point in American business history. Do you think 43 00:03:09,600 --> 00:03:13,840 Speaker 1: that all of that went back to ben Graham and 44 00:03:15,400 --> 00:03:20,160 Speaker 1: his impact on subsequent letter writing. Yeah, I mean, it's 45 00:03:20,320 --> 00:03:23,560 Speaker 1: it's interesting there. And I've seen a few of the 46 00:03:23,680 --> 00:03:27,239 Speaker 1: earlier Buffet letters from earlier in his career, the nineteen 47 00:03:27,280 --> 00:03:32,959 Speaker 1: fifties when he is targeting these over capitalized companies, and 48 00:03:33,040 --> 00:03:36,960 Speaker 1: it is very much like the classic Benjamin Graham in 49 00:03:37,040 --> 00:03:39,920 Speaker 1: the twenties and thirties, and you know, so so um 50 00:03:40,560 --> 00:03:44,160 Speaker 1: he worked at Graham Newman. He definitely got an an 51 00:03:45,320 --> 00:03:49,040 Speaker 1: education there on you know, on that kind of activism. 52 00:03:49,200 --> 00:03:51,560 Speaker 1: But the interesting thing about the Buffet letter in the 53 00:03:51,640 --> 00:03:55,040 Speaker 1: book is it's an opposite kind of an intervention. He 54 00:03:55,120 --> 00:03:59,080 Speaker 1: actually is intervening to support the management in the nineteen 55 00:03:59,160 --> 00:04:04,120 Speaker 1: sixties that an American Express. Well, that brings up a 56 00:04:04,280 --> 00:04:06,640 Speaker 1: point that you really get from reading the book in 57 00:04:06,880 --> 00:04:12,720 Speaker 1: terms of there being three waves of activism, early proxy 58 00:04:12,880 --> 00:04:17,800 Speaker 1: tiers and the eighties corporate raiders, and then recently the 59 00:04:17,880 --> 00:04:22,640 Speaker 1: hedge fund activist. Uh, do you think that this is 60 00:04:22,720 --> 00:04:29,760 Speaker 1: a natural progression. Yeah, I mean, the progression has very 61 00:04:29,880 --> 00:04:32,640 Speaker 1: much been defined by the nature of the behind the 62 00:04:32,720 --> 00:04:36,680 Speaker 1: scenes passive shareholders. So in the nineteen fifties you had 63 00:04:36,760 --> 00:04:43,560 Speaker 1: this diverse and diffuse shareholder base of public companies and 64 00:04:44,800 --> 00:04:48,120 Speaker 1: of individual investors, and so the proxy fights in the 65 00:04:48,240 --> 00:04:52,840 Speaker 1: nineteen fifties were very orchestrated political campaigns. And beginning in 66 00:04:52,920 --> 00:04:57,320 Speaker 1: the sixties, share ownership of public companies began to concentrate 67 00:04:57,400 --> 00:05:01,360 Speaker 1: in the hands of these big fiduciary investors, the pension funds, 68 00:05:02,080 --> 00:05:07,080 Speaker 1: things like that, and so activism evolved because of that 69 00:05:07,640 --> 00:05:11,400 Speaker 1: changing nature. And the turning point in my book is 70 00:05:11,960 --> 00:05:16,240 Speaker 1: when Ross Perot was bought out of GM, and the 71 00:05:16,960 --> 00:05:21,400 Speaker 1: passive investors were so furious about that that that they 72 00:05:21,480 --> 00:05:24,599 Speaker 1: began to get a lot more engaged in the governance debate, 73 00:05:24,720 --> 00:05:27,760 Speaker 1: and that has resulted in the hedge fund activism of today. 74 00:05:29,080 --> 00:05:34,040 Speaker 1: We'll continue this conversation with Jeff Graham, author of Dear Chairman, 75 00:05:34,520 --> 00:05:38,920 Speaker 1: Boardroom Battles, and the Rise of Shareholder Activism in just 76 00:05:39,160 --> 00:05:42,560 Speaker 1: a moment. This is a closer look with Arthur Levitt. 77 00:05:43,160 --> 00:05:55,160 Speaker 1: It's twelve minutes past the hour. This is a closer 78 00:05:55,240 --> 00:05:58,880 Speaker 1: look at Jeff Graham, a hedge fund manager and author 79 00:05:59,040 --> 00:06:06,440 Speaker 1: of Dear Chairman, about how shareholder activism challenges inefficient corporations. 80 00:06:07,240 --> 00:06:13,640 Speaker 1: I'm Artha Levitt. Jeff tell us about the first highly 81 00:06:13,960 --> 00:06:21,120 Speaker 1: confident letter, Carl Icon, Phillips Petroleum, and Michael Milkin, and 82 00:06:21,279 --> 00:06:24,560 Speaker 1: what lesson for your students is in this story. And 83 00:06:25,600 --> 00:06:29,400 Speaker 1: I might say that my first encounter with highly confident 84 00:06:30,400 --> 00:06:35,080 Speaker 1: was with Mike Milkin, who would tell various companies that 85 00:06:35,800 --> 00:06:40,360 Speaker 1: he was highly confident that he could raise a certain 86 00:06:40,400 --> 00:06:43,720 Speaker 1: amount of money for them, and that was equivalent to 87 00:06:43,880 --> 00:06:49,640 Speaker 1: a guarantee. Mike Milkin saying highly confident meant it's in 88 00:06:49,760 --> 00:06:54,040 Speaker 1: the bag, I will do it for you. Well, this 89 00:06:54,440 --> 00:06:59,279 Speaker 1: this all happened because of this, the stinginess of Carl Cohn, 90 00:06:59,400 --> 00:07:04,680 Speaker 1: and then he's going after Phillips and he announces that 91 00:07:04,880 --> 00:07:08,560 Speaker 1: he intends to to launch a tender offer if Phillips 92 00:07:08,600 --> 00:07:12,040 Speaker 1: does not meet his demands. I think he expects them 93 00:07:12,120 --> 00:07:14,240 Speaker 1: to meet his demands and to not actually have to 94 00:07:14,320 --> 00:07:17,000 Speaker 1: launch that tender offer, and so to line up the 95 00:07:17,120 --> 00:07:22,160 Speaker 1: capital he's negotiating with Milken and he does not want 96 00:07:22,200 --> 00:07:26,240 Speaker 1: to pay a commitment fee, you know, for this four 97 00:07:26,320 --> 00:07:29,400 Speaker 1: billion dollars that he has to raise, and they argue 98 00:07:29,440 --> 00:07:32,840 Speaker 1: and they and they argue, and finally, I think Leon 99 00:07:32,960 --> 00:07:37,320 Speaker 1: Black from Drexel proposes, well, how about, you know, we'll 100 00:07:37,400 --> 00:07:40,600 Speaker 1: just say that we're highly confident that we can do it. 101 00:07:41,160 --> 00:07:44,800 Speaker 1: It's not illegally binding, but um, it will be an 102 00:07:44,840 --> 00:07:47,000 Speaker 1: indication to the market that we can raise that money. 103 00:07:48,120 --> 00:07:50,360 Speaker 1: And they go back and forth and Icon say as well, 104 00:07:50,800 --> 00:07:52,600 Speaker 1: I mean, that's not going to do anything. It's that 105 00:07:52,680 --> 00:07:55,640 Speaker 1: has no credibility. But then he he sleeps on it, 106 00:07:55,840 --> 00:07:58,800 Speaker 1: and the next day he comes back to Black and says, well, 107 00:08:00,080 --> 00:08:02,280 Speaker 1: this is a typical, but let's give this a shot. 108 00:08:02,440 --> 00:08:05,640 Speaker 1: And that's the way that the highly Confident letter was born. 109 00:08:05,800 --> 00:08:08,800 Speaker 1: And it didn't take long before Drexel figured out that 110 00:08:08,880 --> 00:08:11,280 Speaker 1: they could charge a lot of money for, you know, 111 00:08:11,440 --> 00:08:17,920 Speaker 1: for that non commitment. How fascinating because highly Confident became 112 00:08:18,200 --> 00:08:21,960 Speaker 1: almost legal tender from that point on. You have a 113 00:08:22,080 --> 00:08:26,520 Speaker 1: chapter on hedge fund activism about Dan Loeb and Star 114 00:08:26,680 --> 00:08:31,880 Speaker 1: Gas Partners. Why did you choose this particular story and 115 00:08:32,360 --> 00:08:38,440 Speaker 1: why is it important? Well, it's interesting because it's an 116 00:08:38,480 --> 00:08:42,760 Speaker 1: inflammatory letter. I do feel like Dan Loebe was the 117 00:08:42,960 --> 00:08:49,120 Speaker 1: key figure in the the early two thousand's inflammatory shame 118 00:08:49,200 --> 00:08:53,840 Speaker 1: driven hedge fund activism, and that was the most extreme one. 119 00:08:53,920 --> 00:08:57,280 Speaker 1: He calls out the CEO is mother. He he ends 120 00:08:57,320 --> 00:09:00,559 Speaker 1: the letter by saying, you know, I know you personally, 121 00:09:00,600 --> 00:09:02,079 Speaker 1: and I think that you need to go back to 122 00:09:02,160 --> 00:09:04,120 Speaker 1: the Hamptons and do what you do best, which is 123 00:09:04,720 --> 00:09:07,079 Speaker 1: like to hob nob with you know, a bunch of 124 00:09:07,160 --> 00:09:12,000 Speaker 1: other socialites. And you know, that era of of Hegephon 125 00:09:12,040 --> 00:09:15,280 Speaker 1: activism did not last that long because ultimately the behind 126 00:09:15,320 --> 00:09:18,359 Speaker 1: the scenes passive investors began to side with the activists 127 00:09:18,920 --> 00:09:22,439 Speaker 1: and the shame game was no longer necessary. But that 128 00:09:22,720 --> 00:09:24,959 Speaker 1: was the height of the shame driven activism, and it 129 00:09:25,040 --> 00:09:28,120 Speaker 1: was a fascinating period. You've said, Jeff that one of 130 00:09:28,240 --> 00:09:32,720 Speaker 1: your favorite letters is a speech by Merrill lynches Win 131 00:09:32,880 --> 00:09:37,320 Speaker 1: Smith at the shareholders meeting to approve the company's sale 132 00:09:37,760 --> 00:09:41,319 Speaker 1: to Bank of America. You couldn't include it in the book, 133 00:09:41,440 --> 00:09:44,720 Speaker 1: but could you tell us why you like this so much? 134 00:09:45,760 --> 00:09:49,520 Speaker 1: It's a very powerful speech. Um. You know that meeting was, 135 00:09:49,960 --> 00:09:53,160 Speaker 1: you know, it was essentially the funeral of Merrill Lynch 136 00:09:54,160 --> 00:09:56,640 Speaker 1: and when Smith had given his life to that company, 137 00:09:57,000 --> 00:10:02,079 Speaker 1: and the whole case show is the power of of 138 00:10:02,240 --> 00:10:06,679 Speaker 1: bad governance. You had basically a small unit of that 139 00:10:06,880 --> 00:10:11,679 Speaker 1: business drive the whole plane into the ocean. And that's 140 00:10:11,720 --> 00:10:13,839 Speaker 1: the thing that you see over and over again in 141 00:10:13,920 --> 00:10:17,520 Speaker 1: my book. You know, at General Motors you have a 142 00:10:17,720 --> 00:10:20,800 Speaker 1: very fine line between the good GM and the bad GM, 143 00:10:20,880 --> 00:10:23,120 Speaker 1: and it's all because of governance, and it's amazing how 144 00:10:23,200 --> 00:10:26,160 Speaker 1: quickly it can go badly. Have you ever said a 145 00:10:26,280 --> 00:10:31,440 Speaker 1: dear Chairman letter or part of an activist campaign? UM? 146 00:10:31,520 --> 00:10:35,000 Speaker 1: I've done several, and UM A bunch of them have 147 00:10:35,160 --> 00:10:39,480 Speaker 1: been just direct, and the one that I did publicly 148 00:10:39,679 --> 00:10:41,640 Speaker 1: was a terrible one. It like it has a typo 149 00:10:41,720 --> 00:10:44,959 Speaker 1: in it, and it was just a few words with 150 00:10:45,040 --> 00:10:48,800 Speaker 1: a lot of passive voice. UM. I think my finest 151 00:10:48,840 --> 00:10:53,360 Speaker 1: dear Chairman moment was I did this campaign to kind 152 00:10:53,400 --> 00:11:00,400 Speaker 1: of extract and an urgent care clinic that was publicly 153 00:11:00,440 --> 00:11:03,760 Speaker 1: traded but owned by the Blue Cross affiliate of its state. 154 00:11:03,840 --> 00:11:05,240 Speaker 1: And I had to write a lot of letters to 155 00:11:05,320 --> 00:11:10,199 Speaker 1: the board and the CEO to compel them two, you know, 156 00:11:10,320 --> 00:11:16,840 Speaker 1: to manage this company which which they controlled appropriately. But ultimately, 157 00:11:17,040 --> 00:11:20,439 Speaker 1: I mean, I'm not that much of an activist. I UM, 158 00:11:21,800 --> 00:11:26,280 Speaker 1: I have been involved in activism just as a defensive mechanism, 159 00:11:26,360 --> 00:11:28,439 Speaker 1: but it's not the way that I run my fund. 160 00:11:30,559 --> 00:11:33,559 Speaker 1: Your book shows that they'll always be a struggle between 161 00:11:34,600 --> 00:11:40,040 Speaker 1: management and shareholders. Do you view that as a good thing, 162 00:11:40,960 --> 00:11:46,520 Speaker 1: as a desirable tension, Yeah, I mean the incentives are 163 00:11:46,600 --> 00:11:50,720 Speaker 1: never going to be perfectly aligned, and this the shareholders 164 00:11:51,280 --> 00:11:55,120 Speaker 1: are in theory supposed to to appoint the board that 165 00:11:55,600 --> 00:12:00,559 Speaker 1: that oversees the CEO, And so you do want to 166 00:12:00,920 --> 00:12:03,679 Speaker 1: to have healthy descent, and you do want to to 167 00:12:03,840 --> 00:12:08,760 Speaker 1: have at times in like an adversarial relationship in ways. 168 00:12:09,679 --> 00:12:11,480 Speaker 1: Is it fair to say that a reading of the 169 00:12:11,600 --> 00:12:15,599 Speaker 1: book would suggest that you believe that Corporate America is 170 00:12:15,720 --> 00:12:20,160 Speaker 1: not working in the best interests of shareholders. Yeah, that's fair. 171 00:12:20,280 --> 00:12:24,560 Speaker 1: I mean, the book is intended to teach you how 172 00:12:24,600 --> 00:12:27,160 Speaker 1: to think about these issues and and to give you 173 00:12:27,240 --> 00:12:31,560 Speaker 1: the historical context. But as an investor in public companies, 174 00:12:32,320 --> 00:12:35,439 Speaker 1: I've seen so much bad governance, and I mean, I 175 00:12:35,520 --> 00:12:39,679 Speaker 1: think it's impossible for anyone that does active management in 176 00:12:39,760 --> 00:12:43,000 Speaker 1: the way that I do um to not have that 177 00:12:43,080 --> 00:12:46,040 Speaker 1: same opinion. Just that lots of oversight is bad, that 178 00:12:46,200 --> 00:12:49,720 Speaker 1: in the small cap space that's it can be particularly bad. 179 00:12:50,679 --> 00:12:55,040 Speaker 1: He runs a value oriented hedge fund, teachers investing at 180 00:12:55,080 --> 00:12:59,760 Speaker 1: Columbia Business School, and he's the author of Dear Chairman, 181 00:13:00,320 --> 00:13:05,240 Speaker 1: board Room Battles in the Rise of Shareholder Activism. Charles R. 182 00:13:05,320 --> 00:13:10,760 Speaker 1: Schwab said Dear Chairman should be required reading for anyone 183 00:13:10,800 --> 00:13:15,520 Speaker 1: who wants to participate as investor or manager. Jeff Graham 184 00:13:15,600 --> 00:13:19,200 Speaker 1: will return for part two of this interview next week 185 00:13:19,320 --> 00:13:23,360 Speaker 1: at this same time. By the way, if you have 186 00:13:24,000 --> 00:13:27,800 Speaker 1: any comments about the show or any ideas for topics, 187 00:13:27,880 --> 00:13:31,720 Speaker 1: please email me at A Closer Look at Bloomberg dot net. 188 00:13:32,480 --> 00:13:36,160 Speaker 1: That's a closer look one word at Bloomberg dot net. 189 00:13:37,400 --> 00:13:40,400 Speaker 1: This is a closer Look with Arthur Levitt. It's twenty 190 00:13:40,440 --> 00:13:48,800 Speaker 1: five minutes past the hour. This is a closer Look 191 00:13:48,880 --> 00:13:51,880 Speaker 1: with Arthur Lebbott. Arthur Lebott is a former chairman of 192 00:13:51,920 --> 00:13:55,120 Speaker 1: the u S Securities and Exchange Commission, a Bloomberg LP 193 00:13:55,320 --> 00:13:58,840 Speaker 1: board member, and a senior adviser to the Promontory Financial Group. 194 00:14:01,040 --> 00:14:04,000 Speaker 1: This week, we continue our closer look at hedge fund 195 00:14:04,080 --> 00:14:08,400 Speaker 1: manager Jeff Graham. He began his career as a senior 196 00:14:08,480 --> 00:14:14,120 Speaker 1: analyst at Melan hb V Alternative Strategies. He was a 197 00:14:14,200 --> 00:14:20,680 Speaker 1: managing director at Arklow Capital. Currently he's managing director at 198 00:14:20,760 --> 00:14:26,760 Speaker 1: Bandara Partners, and he's just published his first book, Dear Chairman, 199 00:14:27,400 --> 00:14:33,080 Speaker 1: Boardroom Battles and the Rise of Shareholder Activism, organized around 200 00:14:33,200 --> 00:14:39,560 Speaker 1: a collection of fascinating shareholder letters that illustrate the history 201 00:14:39,640 --> 00:14:46,360 Speaker 1: of activism between public companies, shareholders and boards, something he 202 00:14:46,560 --> 00:14:53,760 Speaker 1: sees as required reading for his students at Columbia University. Jeff, 203 00:14:53,880 --> 00:14:58,160 Speaker 1: do you think that in general activists make companies more 204 00:14:58,320 --> 00:15:03,720 Speaker 1: profitable and more active? Um Um? I do believe that 205 00:15:03,880 --> 00:15:07,560 Speaker 1: the pervasive threat of activism is a very good thing. 206 00:15:07,680 --> 00:15:12,600 Speaker 1: I think it's important that the boards of directors are 207 00:15:12,680 --> 00:15:15,720 Speaker 1: held accountable and that they know there's a shareholder of 208 00:15:15,840 --> 00:15:21,600 Speaker 1: looking over their shoulders. Um activism. But the actual interventions 209 00:15:21,640 --> 00:15:24,560 Speaker 1: can be hit or miss, but I find that it 210 00:15:24,720 --> 00:15:29,280 Speaker 1: usually does add value as well. You know, having served 211 00:15:29,360 --> 00:15:35,600 Speaker 1: on dozens of boards, Jeff, and studying the areas that 212 00:15:35,760 --> 00:15:39,840 Speaker 1: the book touches on, I have to say that my 213 00:15:40,000 --> 00:15:45,080 Speaker 1: own feeling is that the notion of a totally independent 214 00:15:45,200 --> 00:15:50,240 Speaker 1: director I find to be kind of far fetched. You've 215 00:15:50,320 --> 00:15:54,480 Speaker 1: studied it from a different perspective, You've read about it 216 00:15:55,240 --> 00:16:01,560 Speaker 1: and really looked at it with a very uh, unprejudiced 217 00:16:01,760 --> 00:16:06,360 Speaker 1: I I'd like to ask you whether you feel there 218 00:16:06,520 --> 00:16:14,160 Speaker 1: really is in general a non biased independent director that 219 00:16:14,360 --> 00:16:18,360 Speaker 1: isn't in one way or another beholden to the chairman. Now, 220 00:16:18,480 --> 00:16:21,920 Speaker 1: I mean, if they are independent, it is a state 221 00:16:21,960 --> 00:16:27,760 Speaker 1: of mind. Um. The problem is that even if you're 222 00:16:27,800 --> 00:16:31,200 Speaker 1: independent under all of the kind of the technically the 223 00:16:31,280 --> 00:16:36,880 Speaker 1: technical definitions a board is it's partly it's it's a 224 00:16:37,000 --> 00:16:40,360 Speaker 1: social organization, and by being on the board, you begin 225 00:16:40,440 --> 00:16:43,080 Speaker 1: to become a friendly with the other board members, and 226 00:16:43,240 --> 00:16:47,880 Speaker 1: you ultimately become in particular ways beholden to the chairman 227 00:16:48,600 --> 00:16:52,880 Speaker 1: and the CEO. And so the problem with a board 228 00:16:52,920 --> 00:16:58,440 Speaker 1: independence as a criteria is it's inherently flawed in that 229 00:16:58,640 --> 00:17:03,440 Speaker 1: it doesn't actually correlate to being a quality board member. 230 00:17:03,880 --> 00:17:07,240 Speaker 1: And ultimately, at the heights of industry, you're gonna have 231 00:17:07,320 --> 00:17:10,639 Speaker 1: a lot of conflicts of interest. And if you have 232 00:17:11,560 --> 00:17:15,560 Speaker 1: a completely unconflicted board member, they're probably not going to 233 00:17:15,640 --> 00:17:18,200 Speaker 1: be an industry expert and they're probably not gonna be 234 00:17:18,280 --> 00:17:20,840 Speaker 1: the best director. And you know, so how do you 235 00:17:20,880 --> 00:17:24,000 Speaker 1: grapple with that problem? Like, you want to have people 236 00:17:24,119 --> 00:17:26,520 Speaker 1: involved in the industry that knowed the business very well, 237 00:17:27,119 --> 00:17:30,040 Speaker 1: and so they're bound to have some some inherent conflicts. 238 00:17:31,400 --> 00:17:36,440 Speaker 1: That's absolutely right, and that's why this book is is 239 00:17:36,960 --> 00:17:42,680 Speaker 1: so important because it gets into the tensions and the 240 00:17:42,800 --> 00:17:52,040 Speaker 1: personalities of the various stakeholders in the process. Uh, if 241 00:17:52,080 --> 00:17:57,080 Speaker 1: you carry it to its legitimate lengths, America's workers really 242 00:17:58,160 --> 00:18:01,560 Speaker 1: own so much of the industry you through their pension plans, 243 00:18:03,000 --> 00:18:07,879 Speaker 1: and yet they exercise in general, very little power except 244 00:18:07,960 --> 00:18:17,119 Speaker 1: through organizations. Do you think the typical shareholder in a 245 00:18:17,280 --> 00:18:22,120 Speaker 1: pension fund knows that they have any power or knows 246 00:18:22,200 --> 00:18:26,480 Speaker 1: how to use it? Um? I think they don't. But 247 00:18:26,600 --> 00:18:29,280 Speaker 1: I have to admit, UM, I give the pension funds 248 00:18:29,320 --> 00:18:31,720 Speaker 1: a lot of credit. I think that they're trying. They're 249 00:18:31,760 --> 00:18:36,680 Speaker 1: trying to improve governance cowpers and calisters. Um. You know, 250 00:18:36,800 --> 00:18:41,480 Speaker 1: they're progressive on the governance up front, and uh, you know, 251 00:18:41,640 --> 00:18:45,639 Speaker 1: not everything that they try is the best idea. But 252 00:18:45,840 --> 00:18:49,879 Speaker 1: I do think pensioners are in better hands than a 253 00:18:49,920 --> 00:18:54,040 Speaker 1: lot of people think on the governance front. I think 254 00:18:54,119 --> 00:18:59,880 Speaker 1: in general that's true. How would you expect though, that, Hey, 255 00:19:00,560 --> 00:19:07,399 Speaker 1: Police and Fireman's Pension Fund, which is populated with board 256 00:19:07,480 --> 00:19:15,320 Speaker 1: members who are experienced in fighting fires and arresting scoff laws, 257 00:19:16,320 --> 00:19:22,520 Speaker 1: can be equipped to make important investment judgments. Yeah, I mean, 258 00:19:22,880 --> 00:19:26,640 Speaker 1: it's a thorny problem. And ultimately, on the pension fund side, 259 00:19:26,680 --> 00:19:29,200 Speaker 1: they do have a lot of resources, and they have 260 00:19:29,400 --> 00:19:35,160 Speaker 1: allocated some resources to their proxy voting UM. It's even 261 00:19:35,240 --> 00:19:37,960 Speaker 1: scarier when you know, when you take that example and 262 00:19:38,080 --> 00:19:42,240 Speaker 1: then think about UM index funds or et f s 263 00:19:43,160 --> 00:19:46,920 Speaker 1: and then you have the same thing without the allocation 264 00:19:47,000 --> 00:19:54,199 Speaker 1: of resources. And so this whole fiduciary economy that has 265 00:19:54,240 --> 00:19:58,320 Speaker 1: built up since the nineteen sixties creates a huge vacuum 266 00:19:58,440 --> 00:20:01,680 Speaker 1: and governance and the world is only going in that direction. 267 00:20:01,760 --> 00:20:03,840 Speaker 1: I mean, this explosion of e T s is equally 268 00:20:03,920 --> 00:20:08,080 Speaker 1: troubling if you think about it from the governance standpoint, 269 00:20:08,760 --> 00:20:10,880 Speaker 1: and I'm not I mean, I don't have any answers 270 00:20:10,920 --> 00:20:13,639 Speaker 1: on that front. That's the hard part. We'll continue this 271 00:20:13,840 --> 00:20:18,480 Speaker 1: conversation with Jeff Graham, a hedge fund manager at BENDERA 272 00:20:18,680 --> 00:20:23,359 Speaker 1: Partners and author of Dear Chairman In a Moment. This 273 00:20:23,560 --> 00:20:27,000 Speaker 1: is a closer look with Arthur Levitt. It's twelve minutes 274 00:20:27,080 --> 00:20:38,080 Speaker 1: past the hour. This is a closer look at hedge 275 00:20:38,119 --> 00:20:42,919 Speaker 1: fund manager Jeff Graham. He teaches investing at Columbia Business 276 00:20:43,000 --> 00:20:48,040 Speaker 1: School and is the author of Dear Chairman, a fascinating 277 00:20:48,119 --> 00:20:52,880 Speaker 1: new book on the history of shareholder activism. Jeff, tell 278 00:20:52,960 --> 00:20:56,160 Speaker 1: me a little bit about your hedge fund, Bandera Partners. 279 00:20:57,119 --> 00:21:02,480 Speaker 1: It's focused on value investing. What does that mean? Where 280 00:21:02,480 --> 00:21:05,879 Speaker 1: are you finding value these days? And how are you 281 00:21:06,040 --> 00:21:11,520 Speaker 1: doing well? We basically are a concentrated value fund and 282 00:21:11,680 --> 00:21:15,240 Speaker 1: we own you know, fifteen to twenty positions, and we 283 00:21:15,359 --> 00:21:17,560 Speaker 1: do deep research on the companies that we own, and 284 00:21:18,320 --> 00:21:21,600 Speaker 1: we will get involved in the governance site. I'm all 285 00:21:21,640 --> 00:21:24,639 Speaker 1: serve on on corporate boards of positions that we have 286 00:21:25,800 --> 00:21:29,080 Speaker 1: and uh, we're doing okay. It's a it's a hard 287 00:21:29,160 --> 00:21:31,879 Speaker 1: environment to to do what we do and to to 288 00:21:32,040 --> 00:21:36,840 Speaker 1: charge the fee structure that we charge. Um, but it's 289 00:21:36,840 --> 00:21:40,800 Speaker 1: a job I love and UM, you know, I get 290 00:21:40,880 --> 00:21:45,240 Speaker 1: to I get to value companies and and it's extremely fascinating. 291 00:21:45,320 --> 00:21:48,159 Speaker 1: It's a like it's a lot like the process of 292 00:21:48,240 --> 00:21:53,359 Speaker 1: running this book. Now. The fund has a large holding 293 00:21:53,440 --> 00:21:58,680 Speaker 1: of Popeye's Kitchen, and I interviewed the CEO, Cheryl Badge Elder. 294 00:21:58,800 --> 00:22:04,200 Speaker 1: She was impressive. Is management of the company the reason 295 00:22:04,280 --> 00:22:07,440 Speaker 1: that you like it so much. At the time I 296 00:22:07,560 --> 00:22:11,320 Speaker 1: got involved, Cheryl had already been the CEO for a 297 00:22:11,400 --> 00:22:15,280 Speaker 1: year and and she was doing an incredible job, and 298 00:22:15,520 --> 00:22:20,480 Speaker 1: the financial crisis hit and it obscured um the success 299 00:22:20,600 --> 00:22:22,639 Speaker 1: that the company was having. And so I got to 300 00:22:22,760 --> 00:22:26,520 Speaker 1: buy a great long term franchise in the middle of 301 00:22:26,600 --> 00:22:29,159 Speaker 1: a turnaround at a time when when no one was 302 00:22:29,200 --> 00:22:33,840 Speaker 1: paying attention to the successes that they've had. And I 303 00:22:33,920 --> 00:22:37,320 Speaker 1: think that she's been excellent as a CEO. And um, 304 00:22:38,520 --> 00:22:43,240 Speaker 1: you know, the one thing that Popeye's has not excelled 305 00:22:43,280 --> 00:22:47,320 Speaker 1: at is their capital allocation. They've been extremely conservative, and 306 00:22:48,400 --> 00:22:51,639 Speaker 1: the shareholders at various times in the past five years 307 00:22:52,400 --> 00:22:54,800 Speaker 1: have begun to raise their voices about, oh, we need 308 00:22:54,880 --> 00:22:58,200 Speaker 1: to um to buy back shares, to be more aggressive 309 00:22:58,240 --> 00:23:03,840 Speaker 1: on the the capital alloca in front and uh, and 310 00:23:04,040 --> 00:23:06,159 Speaker 1: Cheryl has been so great on the operating side and 311 00:23:06,200 --> 00:23:10,520 Speaker 1: the performance has been so good that those arguments, UM, 312 00:23:10,720 --> 00:23:13,280 Speaker 1: you know, UM, I have not had too much influence 313 00:23:13,320 --> 00:23:18,800 Speaker 1: with the shareholder base yet. Now, when you teach at Columbia, 314 00:23:19,880 --> 00:23:22,800 Speaker 1: what what do you say to your students? What advice 315 00:23:22,920 --> 00:23:25,920 Speaker 1: do you give them if they want to be in 316 00:23:26,520 --> 00:23:32,639 Speaker 1: the business of managing funds? Well, the whole point of 317 00:23:32,720 --> 00:23:36,359 Speaker 1: my class is about valuing companies and and I'm really 318 00:23:36,480 --> 00:23:39,040 Speaker 1: just trying to teach the students to think and to 319 00:23:39,160 --> 00:23:42,640 Speaker 1: be open minded, and to to to approach each company 320 00:23:43,320 --> 00:23:46,320 Speaker 1: up with an open mind and to think clearly about it. 321 00:23:46,400 --> 00:23:49,119 Speaker 1: And you'd be surprised at how hard it is for 322 00:23:49,640 --> 00:23:53,359 Speaker 1: people to do that. They will have a lot of 323 00:23:53,480 --> 00:23:57,240 Speaker 1: preconceived notions about how things work, and I think it's 324 00:23:57,359 --> 00:24:01,639 Speaker 1: just important to approach know their their whole career that 325 00:24:02,359 --> 00:24:04,879 Speaker 1: the same way. I mean, you know, UM, a lot 326 00:24:04,920 --> 00:24:07,080 Speaker 1: of these students like they'd like to work at a 327 00:24:07,160 --> 00:24:11,399 Speaker 1: hedge fund, and I just think I try to pound 328 00:24:11,440 --> 00:24:13,639 Speaker 1: into their heads that they need to be creative about 329 00:24:13,720 --> 00:24:16,080 Speaker 1: the job search. They need to approach their job search 330 00:24:16,160 --> 00:24:20,600 Speaker 1: the way that they approach uh, researching a company. And 331 00:24:20,760 --> 00:24:27,600 Speaker 1: that's just my main goal as an adjunct professor at Columbia. 332 00:24:27,760 --> 00:24:32,040 Speaker 1: You say you want to improve your students quick filter. 333 00:24:32,840 --> 00:24:36,679 Speaker 1: What's a quick filter? Well, I think, um, a lot 334 00:24:36,760 --> 00:24:40,679 Speaker 1: of our business is that you there's lots of ideas 335 00:24:40,760 --> 00:24:43,680 Speaker 1: come across your desk and then when you actually dive 336 00:24:43,800 --> 00:24:46,600 Speaker 1: in to do research, you're you know, you're committing your 337 00:24:46,640 --> 00:24:50,280 Speaker 1: valuable time. And so to be a good active manager, 338 00:24:50,480 --> 00:24:54,080 Speaker 1: I think it's not so much of being able to 339 00:24:54,600 --> 00:24:57,920 Speaker 1: value a company. It's choosing the right companies to look at, 340 00:24:58,000 --> 00:25:00,159 Speaker 1: and that's your quick filter when you get an idea, uh, 341 00:25:00,840 --> 00:25:02,840 Speaker 1: and in three or five minutes you figure out, oh, 342 00:25:03,080 --> 00:25:06,000 Speaker 1: you know this, this looks promising. I can really dig 343 00:25:06,080 --> 00:25:08,439 Speaker 1: into this. Um. I know lots of people that are 344 00:25:08,480 --> 00:25:12,959 Speaker 1: great investors and in so many ways, but but they 345 00:25:13,040 --> 00:25:15,560 Speaker 1: have a weakness for choosing the wrong things to look at. 346 00:25:16,720 --> 00:25:20,080 Speaker 1: And I think the more that that you do this work, 347 00:25:20,400 --> 00:25:22,520 Speaker 1: the better that you are at valuation, the better that 348 00:25:22,600 --> 00:25:28,639 Speaker 1: you understand businesses, that that quick filter improves. Did you 349 00:25:29,480 --> 00:25:34,480 Speaker 1: have many reservations when you decided to take the big 350 00:25:34,680 --> 00:25:41,119 Speaker 1: risk of starting your own fund? Um? I did. But 351 00:25:41,400 --> 00:25:45,000 Speaker 1: at the same time, UM, you know, I never really 352 00:25:45,080 --> 00:25:49,720 Speaker 1: had the option of being, you know, kind of a 353 00:25:49,840 --> 00:25:54,399 Speaker 1: big cheese at an established st A fund. So it 354 00:25:54,440 --> 00:25:56,760 Speaker 1: would be interesting if I were coming of age in 355 00:25:56,800 --> 00:25:59,240 Speaker 1: the industry now. I think in the industry now, it's 356 00:25:59,320 --> 00:26:02,800 Speaker 1: much harder for small funds to raise capital. I think 357 00:26:02,880 --> 00:26:06,760 Speaker 1: that pedigree is very valuable right now in this way 358 00:26:07,520 --> 00:26:09,880 Speaker 1: that I both you know, I don't completely understand why 359 00:26:09,960 --> 00:26:11,920 Speaker 1: that's the case, but I think it also makes it 360 00:26:12,200 --> 00:26:15,800 Speaker 1: very hard to succeed in the industry on your own 361 00:26:15,880 --> 00:26:21,400 Speaker 1: without some pedigree. Um, what does that mean? It means 362 00:26:21,600 --> 00:26:24,720 Speaker 1: if you have worked at an established fund, so pedigree 363 00:26:24,800 --> 00:26:27,640 Speaker 1: in your job history. If you come out of Third Point, 364 00:26:27,720 --> 00:26:30,959 Speaker 1: or if you come out of Pershing Square. Um, if 365 00:26:31,040 --> 00:26:33,080 Speaker 1: you're a really good analyst that comes out of a 366 00:26:33,160 --> 00:26:35,560 Speaker 1: fund that no one has really heard of, it's gonna 367 00:26:35,560 --> 00:26:37,600 Speaker 1: be much harder for you to raise money. And I 368 00:26:37,680 --> 00:26:40,480 Speaker 1: think that was a lot less the case um in 369 00:26:40,520 --> 00:26:43,520 Speaker 1: the early two thousand's, where you know, we all basically 370 00:26:43,600 --> 00:26:47,159 Speaker 1: came from nowhere anyway, and it was a much younger 371 00:26:47,280 --> 00:26:52,000 Speaker 1: and less mature industry. He's a hedge fund manager, teachers 372 00:26:52,080 --> 00:26:56,399 Speaker 1: investing at Columbia Business School, and he just published his 373 00:26:56,600 --> 00:27:02,879 Speaker 1: first book, The Story of the Rise Shareholder Activism, Told 374 00:27:03,080 --> 00:27:09,760 Speaker 1: compellingly and instructively. Indair Chairman, and I urge all of 375 00:27:10,400 --> 00:27:15,480 Speaker 1: my listeners to buy and read this book. It's a 376 00:27:15,560 --> 00:27:19,680 Speaker 1: book that two sects the dramatic deals and brings to 377 00:27:19,840 --> 00:27:24,600 Speaker 1: life the characters of the past hundred years, told through 378 00:27:24,880 --> 00:27:32,399 Speaker 1: entertaining case studies and absolutely fascinating original letters from some 379 00:27:32,520 --> 00:27:39,280 Speaker 1: of the most legendary and controversial investors and activists. Jeff Graham, 380 00:27:40,040 --> 00:27:43,800 Speaker 1: thanks for joining us, and by the way, If any 381 00:27:43,880 --> 00:27:47,640 Speaker 1: of the audience have comments about the show or suggestions 382 00:27:47,760 --> 00:27:51,159 Speaker 1: for topics, please email me at a Closer Look at 383 00:27:51,240 --> 00:27:55,600 Speaker 1: Bloomberg dot net and follow me on Twitter at Arthur Levitt. 384 00:27:55,680 --> 00:27:59,040 Speaker 1: One word. This is a Closer Look with Arthur Levitt. 385 00:27:59,080 --> 00:28:09,159 Speaker 1: It's twenty five minutes past the hour m HM.