Mason Hawkins: The Importance of Terrific Partners; ‘The Outsiders’

We attended the Value Investor Conference in London, which took place on May 22nd 2014. Below are notes from the presentation by Mason Hawkins of LongLeaf Partners / Southeastern Asset Management (note: These notes are what the presenter said to the best of our knowledge, but there may be some inaccuracies).  Also see: Mason Morfit, ValueAct Capital – Shareholders in the Boardroom, and  Andrew Cormie on Value in Asia

Mason Hawkins, Southeastern Asset Management – The Importance of Terrific Partners

• Referred to the book “The Outsiders”, which he called a masterpiece on corporate leadership and one of the best works on corporate leadership he has ever read.
• While it’s critical to buy good businesses cheaply, it’s important to also partner with outstanding outsiders – particularly now where performance over the next 5 or so years will more likely depend on board actions than more recently.
• Displayed a graph from p187 of “The Outsiders” which compares the performance of companies managed by 8 Outsiders versus GE under Jack Welsch. The Outsiders significantly outperformed.

Mason Hawkins on what corporate leaders are looking for in good people

Q: What are they looking for in good people?

Ans:

1. Good Shareholder Stewards
   • Focus on prudently building shareholder value
2. Wise CapitalAllocator
   • Thereare basically 5 things the company can do with capital
     1. Invest in bonds
     2. Give it to shareholders (dividends)
     3. Re-invest in the business
     4. Make an acquisition (scares the hell out of him because nearly always the seller knows more than the buyer)
     5. Buy back shares and if the stock is cheap then this creates shareholder value (Michael Dell took the advice on this to the extreme and partnered with other people to buy the company and turned his back on the shareholders – however activism by them significantly increased the transaction price)
   • Shareholder Activism has served Southeastern well over the years:
     • Current example is Chesapeake Energy Corporation (NYSE:CHK), which replaced the whole board –  think it is still a good investment going forward – great assets (better production and lower capital requirements than peers)
     • So if you have bad mgmt/CEO all isn’t lost if the asset has been purchased at a large enough discount

Mason Hawkins’ views on shareholder controlling large businesses

Q: View on businesses with a large controlling shareholder?

Ans:

• Be careful
• They like 1 share = 1 vote and someone who owns maybe 30% and works for free.
• Acts of commission not acts of omission keep you up  at night

o   A situation where you’re a minority and partnered with a bad leader is a recipe to keep you up at night.