A couple weeks ago I had the chance to listen to hedge fund manager Jeff Gramm give a speech about his book Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism. It’s one of the most original investment books I’ve read in some time.
Gramm details the history of shareholder activism using case studies of some of the greatest investors of all-time by chronicling their battles with the board members of publicly-traded companies. There were stories about Carl Icahn, Warren Buffett, Benjamin Graham, Ross Perot, Dan Loeb and more that I had never heard of before. It’s a fascinating look at the struggles that can ensue when shareholders and management have different ideas about the direction of corporate strategy.
During his talk Gramm gave some interesting background on how he doggedly tracked down never-before-seen hand-written letters from the likes of Buffett and Graham that were multiple decades old. He was also asked about the growth of indexing and how that will affect shareholder rights and proxy voting. I was surprised to hear him say that he thinks index fund providers are doing a much better job looking out for poor governance than most would assume. For example, he says that Vanguard has 22 people on staff whose sole job is to vote proxies for the companies they own.
But the most interesting aspect of Gramm’s book to me was something that came up at the latest Berkshire Hathaway annual meeting. Buffett actually recommended Dear Chairman in his latest annual shareholder letter, which is quite an honor for a value investor such as Gramm. In the Q&A portion of the event Buffett was asked a question about one of Gramm’s thoughts from the book as well. In the conclusion Gramm makes a prediction about how activism will affect Buffett’s company when he’s no longer around some day:
Berkshire Hathaway is of course a monumental achievement. It is a vast, decentralized conglomerate, far more unwieldy than many of the companies we have seen implode in the pages of this book. Berkshire has compiled an astonishing fifty-year record of success, but, like other large diversified holding companies, it is prone to undervaluation. As recently as 2011 and 2012, Berkshire Hathaway stock was obscenely cheap.
Shareholder activism spares no one, no matter how high their pedestal. Berkshire Hathaway is a public company, and as far as we know, Buffett has not chosen to entrench his successors with new supervoting shares or anything of that sort. How long will his life’s work survive in an era of pervasive shareholding activism? It seems almost inevitable that Buffett’s company, like the public vehicles of so many other successful investors, will become a target. It will be up to Berkshire’s shareholders to defend it.
Buffett responded by saying that this is something he has thought long and hard about over the years but that he was much more worried about it in the past. Berkshire is now structured in a way that it would take a very long time before activists could force changes because of the directors and ownership structure. Buffett also thinks that Berkshire is one of the few conglomerates that is actually worth more as a whole than it would be if the companies were spun-off or sold. So he’s not too worried about a break-up or boardroom shake-up happening anytime soon after he’s no longer running the company.
At Gramm’s talk they played Buffett’s response to see if he had a counterargument. He still wasn’t convinced, even after hearing what the Oracle had to say. He thinks activist investors now have much more power than they used to and have the ability to affect change in ways that were much more difficult in the past.
There are plenty of interested observers who would like to know what Buffett’s contingency plans are for the transition to new management some day at the holding company he’s been building for decades. Buffett has said all along that he knows who will eventually take over but has been tight-lipped about the whole situation to his investors. I’m guessing he’s going to have a few tricks up his sleeve to preserve the company that is his life’s work.
It’s possible that Buffett’s estate will be able to hold off the activists while his shares are slowly transferred to the Gates Foundation and sold off. But you have to assume that a publicity-hungry activist investor or two will eventually take their shot at “unlocking value” in the various Berkshire holding companies.
Buffett is 85. Charlie Munger is 92. Berkshire Hathaway isn’t going to be the same without them and it could happen sooner than most people think. It’s going to be interesting to see how things play out when these two legends are no longer running the show. It’s also worth noting that we’ll likely never see another company like Berkshire Hathaway. Some day that will make them a target.
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