Adam Torres and Andrew Shapiro discuss shareholder activism.
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Show Notes:
Why should corporate boards think like activists? What are the benefits of having an activist shareholder in the boardroom? In this episode, Adam Torres and Andrew Shapiro, Managing Member at Lawndale Capital Management, explore the activist investor landscape along with the Activist Investor Conference in New York City where Andrew will be one of the featured speakers.
About Andrew Shapiro
Andrew Shapiro is the CEO of Lawndale Capital Management and has employed a unique combination of governance, finance, investment, legal, IR, and turnaround / restructuring skills in managing Lawndale’s activist/relational hedge funds over the past three decades. In addition to leading Lawndale, Mr. Shapiro has also personally served as Board Member, Officer, Advisor/Consultant to many corporate boards, debt and equity bankruptcy committees as well as non-profit boards.
Mr. Shapiro is a thoughtful advisor who helps a company transform its capital allocation, governance, compensation and stakeholder engagement to reposition its business towards improved and sustainable cash flow growth and optimal valuation. He is a value-added leader in structuring acquisition, divestiture, turnaround and reorganization transactions and brings creativity, integrity, and passion in procuring negotiated solutions and improved corporate governance processes.
About Lawndale Capital Management
Lawndale Capital Management is an investment advisor that has managed activist hedge funds focused on small- and micro-cap companies that were opened in February 1993. In many of its investments, the firm plays a constructive relational role by actively working with Boards and management teams to help them achieve their strategic and operational goals. In other investments, Lawndale is a direct value-unlocking catalyst, utilizing a range of tools that include aggressively promoting improvements in a company’s governance and operational structures, asserting shareowner’s legal rights and taking active roles in restructuring and buyout proposal negotiations.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres, and if you’d like to apply to be a guest in the show, just head on over to missionmatters. com and click on Be Our Guest to Apply. All right, so today’s guest is Andrew Shapiro, and he’s a Managing Member at Lawndale Capital Management.
Andrew, welcome to the show. Hi, Adam. Thanks for having me on. All right, Andrew. So I understand you’re going to be speaking at the Activist Investor Conference. I know that Charlie and his team are over there throwing in New York City. So I just have to start off with that. Hey, are you excited? am. It’s always great to get back to the East Coast.
I’m based out on the West Coast. It’s great to be in New York and see friends and family there while I’m also getting a chance to speak on a topic that’s near and dear to my heart. Yeah, I’ve been covering the conference now for the last couple of weeks, so I’ve had the, you know, I’ve gotten the opportunity to, you know, Get in the weeds with some of the other speakers and some of the other sponsors and things about the conference overall.
And this, I couldn’t make it to this one, but I’m just this would have been my first one, but we didn’t get to make it to this one, but have you been to these in the past before? I’m just curious. Well, I speak at activist investor conferences and corporate governing conferences across the country pretty regularly.
This particular agenda and this conference is pretty exciting. There’s some very impressive panels and topics and speakers that are, that are attending I think, very important topics. And what is somewhat an ever changing field. And and not, not holding you to this cause I know topics change and also depending on what my audience listens to this, either you would have you’ll just be speaking on it or you would have just spoken to it.
So, because this is going to be out there for a long time, but keeping it high level, what are some of the things you hope to present? I was asked to speak on, and then we expanded the The fireside chat to add another speaker on the topic who I’ve spoken on panels with together. the subject, which is dual subject to why corporate boards should think like.
Shareholder activists and what are the benefits of having an experienced activist shareholder in the boardroom as, as one of the directors and so both Glenn Kaufman and myself have a lot of experience in the boardroom and we’ve been able to see and witness how boards behave differently and enhance their game.
Thank you. When individuals like here, I are part of the board now. I’ve asked everyone that’s come on this in terms of for this, I should say, particular conference, the catalog, just to kind of set the footing here. And I know there’s there’s variations on this. There’s not just 1, you know, right or wrong answer there.
But to you activist investor, like, like, how do you define that? Oh, activist investing is the 1st off, it’s It’s the process of being hyper focused into the process Of a company’s management, its corporate governance structures, the way it allocates capital, and most investors don’t focus on these matters, and if they do, it’s from such a high level that They’re not getting involved or expressing their, their, their views.
And then an activist investor is someone who basically is engaged. Is speaking out, is sharing their, their views, is, is pursuing a dialogue towards the better of the, of the corporate outcomes and, and the corporate operational performance and financial. Performance. I guess that’s how I would distinguish an activist investor from, from one who’s just a passive investor.
I basically, the view is that we’re investing in a company and its future versus investing in a, a stock a ticker symbol and some graph on the, on the computer screen. Yeah, and it’s almost like and I don’t want to I don’t know who I’m gonna butcher when I try and bring out this quote But it was either Buffett or somebody said Like the idea of when you’re buying a stock to you know Think about it like you can’t sell it again on an exchange quite so easily and you had to hold it ten years Then how would you act or how would you move or what decisions would you make?
So in this sense, it almost seems like I guess tying back to your your Your your speaking topic and everything else when it comes to corporate boards why should the corporate boards really think like activists or have somebody there that does? Sure, you know, board should adopt the mindset of shareholder activists for several compelling reasons.
first. Shareholder activists often scrutinize companies with a focus on improving efficiency, transparency, and overall performance. And by thinking like an activist, corporate boards can proactively address weaknesses, they can identify opportunities for growth, and enhance shareholder value. This approach kind of promotes a culture of continuous improvement and responsiveness to market dynamics.
Now, You know, you listen to that and you say, well, of course, you know, that makes sense, but I’ve got to tell you, I’ve been doing this for more than three decades. Most boards are stagnant. They don’t, they don’t think like this. they get stuck in the mud. Adopting a shareholder activist mindset encourages boards to prioritize shareholder interest and align corporate strategies with the goal of maximizing shareholder value.
So many times, and this is the, this is a focus of many an activist fight, the board is focused on and then management self interest, and it’s not Focusing on the true owners of a business, which are its shareholders, in a sense, the people who put them in their jobs. Now, that’s partially a factor of, you know, a failure of the American corporate democratic or election system, where it’s more like a Russian election, where there’s only one slate of candidates that are put up.
But, you know, thinking like an activist gets you, you can have more effective decision making processes. As boards become more attuned to the concerns and expectations. Of shareholders, I mean, it fosters a sense of accountability and ensures the corporate governance is geared towards creating sustainable, long term value, which, of course, is in the best interest of both the company and all of its.
Shareholders and if they think like a shareholder activist, this can help a board anticipate potential challenges and market trends because activists. many investors, but activist investors in particular, often have a keen eye for identifying opportunities that traditional management might overlook.
And by adopting this more proactive and strategic approach, boards can again, stay ahead of the curve and navigate industry changes effectively and position the company for long term success rather than being so, you know, embracing the perspective of a shareholder can transform the boards into this proactive agents of positive change as a shareholder.
I’m investing in a company, not because not for its past performance, but what it could do in the future. And I’m looking forward thinking and that’s what we need boards to think like as well to drive continuous improvement and deliver value to shareholders. What do you think sometimes leads boards to becoming complacent or to complacency?
Because you have a lot of boardroom experience. And what do you think, what do you think causes that? I think the main thing that causes that is the fact that there is tenuous chain of accountability between the shareholders and board members. The job doesn’t seem to have A threat or a risk. In other words, board members get appointed and they kind of get reappointed and reappointed some boards and companies have entrenchment mechanisms what we call classified or staggered boards.
So they have multi year. Terms. And if the board is staggered, it takes at least two full years. Let’s say it’s a nine person board and they’re three year terms. You’re going to have one class of directors three every three years. So it takes at least two years for a majority of the board to get voted out of office.
and replaced, so if all the board members were up for annual election, you could prospectively remove or change a majority of the board in a single year. That would be more accountable than the classified or staggered boards. But but moreover, there are. All kinds of impediments that are placed by corporations in their bylaws as to the rules and the factors that enable or disable the ability of shareholders to call a special meeting, perhaps to.
Cause a change in the board sooner than then when the meeting scheduled or the ability of shareholders to even make nominations of alternative board candidates. There’s new rules that were recently adopted, thankfully, called universal proxy card rules that now enable shareholders. Using the proxy card they are sent, vote at annual meetings of corporations that they would otherwise not attend in person.
It allows them to select amongst both alternate board candidates that might be put up by an activist investor, as well as the company’s nominated board candidates, all in one proxy card, where before, You have to attend the meeting in person to have that choice. So you are always stuck with voting the blue card or the yellow card, management slate, or the activist slate.
So in the upcoming Disney proxy contest, as a result of the new universal proxy card rules, there’ll be one proxy card that will contain all candidates from Nelson Peltz. And Jay Russullo the nominees of Tryan, to the nominees put forth by Blackwell’s, another shareholder, to the Disney slate, and shareholders can evaluate all the candidates, and then they can choose their top nine or top whatever the number is of board seats to select what they think would be the optimal combination.
Yeah, skills and experiences to be put on the board. And so that was a new positive rule change that better enables shareholders to be able to do that. Now, of course, that frankly raises the importance. Or perhaps having experienced activist investors or experienced shareholder advocates as part of the board.
And the reason for that is since it’s going to be easier and less costly for activists to target individual weak directors for replacement. It raises the importance for expedited and recurring internal scrutiny. Of the board’s composition and the relevancy of each board member skills and experience for the company’s future needs board more than ever will now need to have the right skills and experiences to address the issues on the minds of shareholders and that’s before some activist forces such change with their candidate.
So, frankly, I think there’s no better board member now to spearhead such engagement efforts. Of the board with its shareholders than a board member with activist experience and skills in your career. I mean, you led one of the longest running activist hedge funds. So you brought up Disney, that’s 1 case, which you’re welcome to go further into it if you like, or just in general, is there any other company or situation that that you’re following right now that you find interesting?
You know, I had been following the Choice Hotels attempted takeover battle for Wyndham Hotels as I was a finalist to be on the Choice Hotels alternative board slate. Now, they went a different direction and nominated a particular slate they did. But that was a very interesting case because Choice was proposing to elect a slate of new directors onto the board of Wyndham.
And from the moment, and I raised this issue with Choice, from the moment Choice spent all that money to get people elected, you know, to campaign and, and, and proxy solicit, et cetera, to get people elected to that board. Now, they did drop their campaign as of this morning. Here they spend all that money, but the moment I would have been elected, I raised this issue with them, the moment I’m elected to that board of Wyndham, I am a board member of Wyndham, and my job and duty, ironically, is to maximize value for all Wyndham shareholders.
Choice Hotels owns some shares, that’s how they had the right to nominate directors, but I’d have a duty, and I raised this issue, I have the duty to basically extract from Choice Hotels A higher or their best offer and potentially find and get a higher valued alternative than their bid, because my goal and job would be to maximize value on behalf of all the Windham shareholders, despite the fact that choice.
Would have gone through all that pain and suffering and effort and fight to get me and the rest of that choice hotels alternative board slate elected now with UPC. I don’t think the Wyndham shareholders would have elected a full clean slate a new slate anyway. I think they would have elected.
Only a minority slate of a minority of the new nominees, maybe two or three people at most. I think I would have been someone that would have been great for that because I have devoted a career of focusing on maximizing shareholder value. So I would have been a great representative for all Wyndham shareholders put on by choice to help maximize the value for.
All the Wyndham shareholders. That’s a great example. in following kind of the, the Disney situation, I just want to circle back to that one briefly. Does this, like, depending on what happens, is there, what are some of the implications of, like, people using this almost as, as a case study when something like that happens in a company like Disney?
, from your experience. What do you think? Well, this is our crystal ball time, let’s say. I’m not holding you. Sure. Well, when you’re dealing with, you know, saying like a, you know, a case study on this, this proxy contest is not all that different from the proxy contest that we have led or been involved in over the last, you know 30 years you know, there’s a case by case, you know, claims that are being made that, but, but basically the argument try and Nelson Peltz’s group is that the board has to be holden to the C suite that this is Bob Iger’s board, that the board has overly delegated its responsibilities Either to management or has been a rubber stamp.
Case in point, Tryon has argued that the compensation that has been provided to Eiger in the past by this board has been excessive and they allege that it’s been misaligned. With the interests of shareholders, one item they raise note, I’m not a Disney shareholder. I don’t have an ax to grind per se in this case, but I have made these claims and fights and other proxy contests and, and, and battles in, in the companies that I’ve invested in over time.
One of the complaints was that, you know, Iger was the instrumental in, in Disney paying billions upon billions of dollars for Fox. And It’s not clear that that acquisition has even come close to generating an adequate return on the amount paid yet. The comp committee. Granted either a 200M dollars don’t hold me to the exact amount, but it was, but it’s 1 to 200 or more 1M dollars of a bonus just for completing the acquisition rather than.
Having such a bonus be, let’s say, deferred over time based on the actual performance of the acquisition, because that way, the alignment of interest with the shareholders would be that you don’t overpay, that you only expand the empire and grow the company. The universe in a shareholder value accretive way so many times the imperial CEOs that I have fought throughout my career have been growing the empire because more often than not compensation committees rely on compensation consultant studies.
Yeah. That compare what the compensation levels are of companies of similar size. And as companies are larger, compensation levels tend to be larger. So if you grow the empire with an acquisition, it’s one way of basically growing your CEO comp down the road, down the road. So. When you did it and you grant a bonus on just the closing and completing of the acquisition, it didn’t really weigh whether or not it was a good acquisition or not.
So that, that’s one kind of interesting consideration. Another thing I know Tryon raised, I was recently at Council of Institutional Investors Spring 2011. Meeting in DC where Peltz made a presentation to the council members and I’m, I’m, I’m an associate member of the council and I was there. He made the argument that, you know, with a good deal of time left on Bob Iger’s new.
Employment Agreement, the board was conducting a, you know, a succession plan, a succession trying to create a new succession plan because the former succession plan that Mr. Iger had spearheaded, resulting in Bob Chapek, was a disaster, that after only four months, the Disney board Decided to give Eiger another two year extension and cut the succession plan development process short.
Now, that raises an interesting issue. Why did the Disney board do that so soon with so much time left on Eiger’s new contract? You don’t see that in sports with free agency, that they necessarily do it. You could have gone further towards the end of his contract. You could have taken more time trying to find and seeing if there was an adequate successor for him before you gave this, that gave the extension.
So, either the board panicked, which doesn’t say much about the board and argues that perhaps triumphs argument for some board change is needed or. With a wink and a nod, Mr. Iger kind of told the board, well, I’d like to continue doing this. And so maybe we should, you know, cut this process short and, and, and put it off for another few years.
So way, the board was either beholden. or they panicked, and either way, it doesn’t sound, it didn’t seem good to me if I was a Disney shareholder, I, I entered Mr. Peltz’s presentation. With some skepticism, I left that presentation feeling a little bit more that if I was a Disney shareholder, you know what, I think I might, you know, vote for a small change in the board, because that’s all they’re asking is, do people exit?
And Nelson Peltz and Jay Rasulo get added onto the board. So you know, one might argue, what’s the harm? You know, someone argued, well, it could be disruptive. I don’t know if Mr. Peltz is all that disruptive in the boardroom. You know, what I’ve seen over the years, it’s been pretty value added. Wonderful.
Well, Andrew this is I’m, I’m excited to continue to watch these developments unfold and just to kind of reflect back on these conversations that I’ve had and just to see it all play out as you’ve seen these things all play out many, many times in your career. That being said, if somebody is listening to this or watching this and they want to, you know, they want to follow your journey and learn more what’s the best way for people to connect?
Well, I mean, they can follow me on X, the social site formerly known as Twitter, and Lawndale1, that’s Lawndale and the number one or they can follow me on on LinkedIn. I guess that’s a way they could You know, prospectively reach out as I migrate myself into the second act of my career as we wind down my our activist funds after 31 30 to be 32 years when we wind this thing down and I’m looking forward to serving on more boards, which I’ve started to do with some private startup companies already.
Fantastic and looking forward to continue to watch your journey unfold and for everybody that’s listening to this, I will put the link to to Andrew’s LinkedIn, of course, in the in the show notes and all that. So you can just connect and also on Twitter. So you can connect with Andrew and also to the audience.
If this is your first time with Mission Matters or engaging in an episode. We’re all about bringing on business owners, entrepreneurs, and executives and having them share their mission, the reason behind their mission, their work and you know, what we can all learn from that so that we can all grow together.
If that sounds interesting to you or fun or exciting, hit that subscribe button because we have many more mission based individuals coming up the line and we don’t want you to miss a thing. Andrew, again, thank you so much for your time today and for coming on the show. Really appreciate it. Thanks for having me, Adam.
It was a pleasure.