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Comparing notes

4 March 2016 By Jeffrey Goldfarb

A new book about shareholder activism, “Dear Chairman,” opens with a story that may sound familiar. After poring over a big company’s financial statements, an investor discovers a stockpile of securities that could easily be sold and the proceeds distributed to owners. In a private meeting, senior managers patronizingly tell him they know better how to allocate capital and suggest he simply sell the stock if he disagrees.

Perhaps suspecting the investor intends to raise the issue at the annual meeting, the company decides to host the event in a small town some 350 miles away from its New York City offices. With no other shareholders in attendance, the chairman uses procedural rules to muzzle the investor. That invites a stern letter and a proxy fight that deposes two of the five board members, and eventually leads to a plan to pay out the cash.

The sequence of events could be a modern tale of corporate agitation ripped from recent headlines. The year, however, is 1926. The company in question is Northern Pipeline, a fragment of John Rockefeller’s splintered Standard Oil monopoly. The shareholder is none other than Benjamin Graham, the godfather of value investing.

Jeff Gramm, the manager of a small hedge fund and an adjunct professor at Columbia University, spins this and other surprising and riveting yarns in his new book. The story is one of eight investment case studies spanning eight decades he presents in a style that’s both breezy and sophisticated. Each example is accompanied by the poison-pen letter at the heart of the boardroom conflict. “Dear Chairman” is a treat for any student of business or financial history, and a helpful handbook for today’s activist era and beyond.

While Graham’s mutiny may not have been a first for corporate America, it seems as good a place to start as any given his fame and the familiarity of the tactics to investors nowadays. For his next chapter, Gramm skips ahead some 30 years to railroad crusader Robert Young and his fight against New York Central as a representative of the generation of investors who shrewdly rallied other owners behind their causes and came to be known as “Proxyteers.”

Both sides used vitriolic language in myriad missives to shareholders and newspaper ads. The clash was a precursor to nasty contemporary battles led by the likes of billionaire Carl Icahn and Third Point boss Dan Loeb, both of whom also feature later in “Dear Chairman.”

In between, Gramm applies his storytelling skills to Warren Buffett’s intervention at American Express amid the Great Salad Oil Swindle, Ross Perot’s frustrating experience at General Motors and a handful of others, each era informing the next. If anything, though, there are too few examples to tell a fully rounded story of how activist investing evolved.

This may be one reason for Gramm’s reluctance or inability to identify many unifying themes, lessons or suggestions on activist investing or corporate governance. Another may be his choice of anecdotes. Every contentious situation has its unique components, but in this book he presents some particularly oddball affairs, including a wife targeting her husband and Perot aggravating from the inside rather than the outside. That fosters a less instructive guide – though a more compelling read.

Even so, despite an obvious soft spot for pushy investing behavior, Gramm does point to one universal attribute of the combatants: greed. “As much as activists talk about creating value for all shareholders,” he writes, “we should not forget their true motive – profits for themselves and their financial backers.”

There is another useful takeaway from the author’s tour of aggressive finance. The litany of public spats with boardrooms in recent years, and the attention they garner from the media, can make it feel as though activists are another passing investment fad. With so much money piling into their specialized funds, they have achieved so-called “asset class” status unto themselves. That could be seen as a symptom of an activism bubble, but Gramm’s history suggests there’s staying power.

“As shareholder activism has become ubiquitous, it looks less like a defined movement, as it was in the Proxyteer or corporate raider eras,” Gramm concludes. “Instead it is a fixture in the stock market – it is the reality that when enough shareholders are upset at a board or management team, one of them is almost certain to intervene.”

While that may put too much faith in the efficiency of markets, “Dear Chairman” makes it easier to believe in investor insurrections and their usefulness. As Gramm’s final chapter on the disastrous events a decade ago at BKF Capital underscores, the desired outcome may not always be achieved. Each attempt nevertheless requires a leader, and every generation seems to have bred a cadre of them with the necessary ideas, capital and pen to keep the revolution going.


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