Three Things Jeff Gramm Taught Us About Shareholder Activism
Permanent Equity, formerly adventur.es, recently had the pleasure of hosting acclaimed financial author and hedge fund manager Jeff Gramm. He was kind enough to make the trek to Columbia, Missouri, to share his thoughts on shareholder activism, which is the subject of his stellar book Dear Chairman, and discuss the future of business and investing.
As Jeff demonstrates throughout his book, activism comes in all types and flavors. Some activists are public and abrasive, while others are private, confidential, and kind. The central tenet of activism is engagement with leadership, which is something we at Permanent Equity do often and think about constantly. How best can we help our portfolio companies identify and pursue opportunities?
We highly recommend checking out Dear Chairman for yourself, but in the meantime here are a few things we found relevant, helpful, or just interesting from talking with Jeff:
WHAT IS SHAREHOLDER ACTIVISM?
At the most basic level, being an activist shareholder means being engaged with the company, especially in terms of how it is governed. But shareholder activism is often more narrowly understood as shareholders calling for action that conflicts with decisions made by company managers. Activism can be hostile and direct, such as waging a proxy fight to replace members of the Board. It can also be amicable attempts to persuade management to see “the light.” Activism can even be indirect, such as providing funding for activists engaged in more direct action.
While we’re usually the majority shareholder in our portfolio companies, our philosophy at Permanent Equity is to engage company leadership teams as trusted equals. That’s our form of activism. Only in the rarest of circumstances do we dictate strategy, or force changes, and in those cases it’s often to avoid breaking the law. We believe that debate is a vital and healthy part of making good decisions.
BEN GRAHAM SHOWS EVERYONE HOW IT'S DONE.
If you’re not familiar with Ben Graham, or his influence on shareholder activism, his story alone is worth the price of Dear Chairman. Known as the father of value investing, Graham was the first known financial investor to undertake a shareholder activism campaign. His saga was sparked by a footnote in a report that caused him to dig deeper and discover an organization was holding far more assets than needed for operations. In fact, the cash on hand was worth more than the market price of the stock.
Information inefficiency and asymmetry have become rare, especially for public companies. Long gone are the days of limited disclosures, or being able to stumble upon a piece of material and public information that is not widely known. But in the private markets information is still proprietary and often difficult to come by. Much like Ben Graham was able to do in the opaque public markets of the 1920s and 30s, our job at Permanent Equity is to unlock hidden value in the companies we acquire. Our due diligence process often organizes company information differently than is useful in day-to-day operations. Through this detailed process, we often uncover things that current ownership hasn't previously recognized. This type of detective work is a skill, and has proven profitable.
HOW DO ACTIVIST SHAREHOLDERS ELICIT CHANGE?
Fundamentally, shareholder activism is all about persuasion. If you disagree with leadership decisions, how do you affect change? Start by trying to influence the CEO, but a change of heart is rare. Ultimately, the board of directors is in control and holds the authority. Influencing board members can be effective, but often requires changing the board makeup. Sometimes activist shareholders are added to the board voluntarily, but when it becomes adversarial, a proxy fight is the escalation for control.
Thankfully, small private companies operate in far simpler fashion, providing a major advantage. We don’t spend our time worrying about who holds what board seat or trying to build shareholder consensus. This allows for a more streamlined decision-making process and greater focus on strategy execution.
You can find the full video discussion from Jeff Gramm’s March 9th visit on the Reynolds Journalism Institute Facebook page.