About once a month, a PM calls us about some company, wanting to talk about the prospects for an activist project. We review the financials and the filings. Often we suggest the shareholder just move on – the business isn’t worth trying to turn around, or the board and management are too entrenched. Sometimes we suggest a plan. Once in awhile we move ahead with it.
Occasionally, and more often after we suggest moving on, the PM wants to write a strongly-worded letter to the BoD chair and the CEO. Confidence about the investment thesis and frustration about the current results and share price yields a long, detailed, and lively manifesto, an “open letter” to the board, management, and other shareholders.
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
At a minimum, this is a waste of time, energy, and money. Worse, it betrays a certain naive ignorance about activist investing.
We can think of two audiences for such a letter, company leadership and other shareholders. As we noted before, the CEO and BoD don’t care what the PM thinks. They may say they care, but they really don’t. No letter alone, however thoughtful, will persuade executives to change course and do what the investor asks. We can’t think of a single instance in which the CEO reads a letter from an investor and says, “wow, this PM is a genius, let’s do it.”
Other shareholders might find such a letter at least a little interesting. It may express explicitly and succinctlytheir vague concerns about the company. It might affirm their doubts about leadership. It could even spur them to support the PM’s efforts to influence the company.
However, it will have that outcome only if, with a reasonable likelihood of success, the PM will back words with action, or the legitimate threat of potential action. The company and other investors must see that the PM has the means, knowledge, incentive, and will to escalate beyond an “open letter”.
Unentrenched and Legitimate Threat
In some situations, no amount of agitating for change will work. Not only is there no reasonable likelihood of success, the likelihood is approximately zero. The CEO and BoD are just too entrenched. They control substantial blocks of shares, enjoy dual-class share structures that give them control over the BoD, or benefit from staggered BoD positions stacked with friendly directors. You can write as many open letters as you want. They know they can safely ignore them.
An investor in Avalon Holdings (AVX) called recently, and motivated this thinking. The company has attractive assets that it has failed miserably to monetize. But, a dual-class share structure allows the current CEO to control the BoD, and makes any open letter futile.
In other situations, the shareholder does not represent a legitimate threat:
?Means: the PM can’t or won’t spend even a few dollars on attorneys, travel, or other expenses needed to rally support from other investors
?Knowledge: the PM and his or her advisors lack expertise about and experience with corp gov and activist strategy and tactics
?Incentive: the PM owns too few shares to justify an activist project
?Will: the PM worries about what others might think of an activist effort, or otherwise does not demonstrate the resolve to agitate for change at the company.
Even if the CEO and BoD aren’t entrenched, they know that the PM won’t escalate the effort beyond writing a letter. Unless and until the BoD thinks they risk their jobs through a proxy contest, they will ignore you.
Worse, other shareholders will see this, and won’t take you seriously. An open letter without the potential to escalate represent just an empty threat.
It doesn’t take very much to demonstrate the potential to escalate. It takes less than it used to, too. A PM can recruit credible director candidates, or even better commit to serving on the BoD. Own more than a few shares of stock. Show you know something about corp gov, Delaware law, and the company bylaws.
Finally, with means, expertise, incentive, and will, you don’t really need an open letter. Private communication among large shareholders is both legal and healthy. A thoughtful presentation backed by the credibility to escalate will get the attention of every other important investor every time.