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Value of FFH culture


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At AGMs and on conference calls, Prem really stresses the value of the Fairfax fair and friendly corporate culture.  He mentions that companies want to have FFH as a shareholder etc..

 

I noticed that this does not get mentioned on the board that much.  A few questions come to mind.

 

What are your thoughts/opinion of this culture?

Does it really have value?

Can a price be put on this culture?

 

Any thoughts?

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Value of the culture?  Zero.

 

What's the value of a culture that screws minority owners of ORH?  Seriously, Prem screwed us on taking it private.

 

What's the value of a culture that usurps minority owners' voting rights?  It took two votes to make it happen, presumably with some serious arm twisting of institutional holders.

 

What's the value of a culture where the chairman uses his multiple voting shares to appoint his son, who is still wet behind the ears, to the board of directors?  What a joke.

 

What's the value of a culture where the chairman channels $50m of shareholders' money to a firm that employs his son so that his son has a portfolio to manage?  Seriously?  I'd be embarrassed if I needed daddy to do that to ensure my success.

 

The culture is worth ZERO.  The collective brains are the only thing that has worth, but beware that those collective brains are not always focused on the interests of minority holders.

 

 

SJ

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Misinformation about Ben Watson make this board sound like an outpost of FOX news.  Irresponsible claptrap should have no place here.  Be responsible and do your research.

 

Benjamin P. Watsa, 38, is a member of Fairfax Board of Directors. Mr. Watsa is a Partner and Portfolio Manager at Lissom Investment Management Inc., a private investment counselor that provides wealth management services for high net worth clients through the Owners Family of Funds, where he manages the Owners Opportunities Fund, a small and mid-cap focused equity fund. Prior to joining Lissom in 2006, Mr. Watsa worked in New York in investment banking as an Analyst in the Financial Institutions Group at Banc of America Securities from 2001 to 2003 and as an Associate at Cochran Caronia Waller from 2003 to 2006. Mr. Watsa is a member of the Finance Committee of the Rideau Hall Foundation, and is a resident of Toronto, Ontario, Canada

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i didn’t now that Prem employed his failed hedge fund manager son at FFH. May be immaterial from an investment perspective for now,  it certainly does not a sign of a transparent culture.

 

 

To be clear, Ben Watsa does not appear to actually work at FFH or in any of the subs.

 

Rather, Prem was on the board of directors of a large Canadian charity for a number of years.  One other fellow who was also on that board of directors happens to run an investment firm in Toronto.  Coincidentally, a few years later, it appears as if Ben Watsa was hired by that fellow's investment firm.  Now, that's not that unusual, in and of itself; most of the jobs we get are due to relationships that we've built over the years, so if Ben impressed the boss of that investment firm when he and Prem encountered the fellow socially, that would not at all be unusual.

 

What is unusual is that the Q3 report discloses that FFH has now shifted $50m to this fellow's investment firm, and the specific person managing that $50m is Ben Watsa.  So, why was that done?  You've already got plenty of internal investment management capacity at Hamblin-Watsa.  You've already got Brian Bradstreet in-house.  Why do you suddenly need to out-source the management of $50m?  And, if you do need to outsource the management of $50m, why specifically does it go to Ben Watsa's firm?  After all, there's 100s of investment firms in Toronto that have a far longer track record than Ben Watsa, to say nothing of FFH's long standing relationship with Mason Hawkins and Francis Chou (it's pretty obvious to me that Mason Hawkins has forgotten more about investments than most of us will ever know).

 

So, it doesn't look good.  The related-party transaction was disclosed in the filings, but the disclosure was paltry.  How much are shareholders paying Ben Watsa to manage our money?  Is it 100 bps, 200 bps, some other amount?  Is this a real transaction done for the demonstrable benefit of shareholders, or is this a case where Prem is having shareholders pay 200 bps on $50m to ensure that his son will have a well-paid job?  Who the hell knows?  The one thing that I do know is that it erodes Prem's reputation when he does wacky things like this.

 

 

SJ

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Misinformation about Ben Watson make this board sound like an outpost of FOX news.  Irresponsible claptrap should have no place here.  Be responsible and do your research.

 

Benjamin P. Watsa, 38, is a member of Fairfax Board of Directors. Mr. Watsa is a Partner and Portfolio Manager at Lissom Investment Management Inc., a private investment counselor that provides wealth management services for high net worth clients through the Owners Family of Funds, where he manages the Owners Opportunities Fund, a small and mid-cap focused equity fund. Prior to joining Lissom in 2006, Mr. Watsa worked in New York in investment banking as an Analyst in the Financial Institutions Group at Banc of America Securities from 2001 to 2003 and as an Associate at Cochran Caronia Waller from 2003 to 2006. Mr. Watsa is a member of the Finance Committee of the Rideau Hall Foundation, and is a resident of Toronto, Ontario, Canada

 

 

Yes, Daphne, we should try to be responsible.  How do you feel about FFH's decision to suddenly invest $50m of shareholders' money with Lissom and specifically under Ben's management?  As a shareholder, does this give you comfort?  Or would you be more comforted by having it invested by Hamblin-Watsa like all of the rest of the portfolio? 

 

 

SJ

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A few thoughts,

 

If I heard correctly in a recent AGM, I thought Prem mentioned Ben's investment performance was better than his (over what time period - I have no idea).  I am speculating, but perhaps Ben's investment style is different than his father's (i.e., less dog stocks, more quality).  In this case, it would make sense to diversify to other investment managers. Again, pure speculation.

 

I understand the arguments against the FFH culture (re: voting shares etc..).  Viewed from a certain position, the arguments have merit. 

 

I am also interested in what other companies think of the FFH fair and friendly culture.  For example, if ABC company is going to be taken over by Onex, KKR, or FFH, do they have a preference?  Do they care, as long as the price is right?

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Is the culture at Fairfax such that they are able to keep their key people long term? I am very impressed with Brian Bradstreet, Andy Bernard and more. Zenith is a great example of How FFH likes to do acquisitions and the fianancial results at this company post acquisition have been stellar. Looks to me that very smart people at FFH believe in the company; if they did not they would simply leave. There is lots to like about Fairfax and I do believe much of that is due to the culture they have built over many years.

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I don't think FFH is attractive as Berkshire. In Berkshire the managers have complete control and are not bothered by the HQ. I don't know how it works in FFH land but looks like HQ tells people how to do things. (e.g:, committee for insurance).

 

A few thoughts,

 

If I heard correctly in a recent AGM, I thought Prem mentioned Ben's investment performance was better than his (over what time period - I have no idea).  I am speculating, but perhaps Ben's investment style is different than his father's (i.e., less dog stocks, more quality).  In this case, it would make sense to diversify to other investment managers. Again, pure speculation.

 

I understand the arguments against the FFH culture (re: voting shares etc..).  Viewed from a certain position, the arguments have merit. 

 

I am also interested in what other companies think of the FFH fair and friendly culture.  For example, if ABC company is going to be taken over by Onex, KKR, or FFH, do they have a preference?  Do they care, as long as the price is right?

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The purpose of my previous thread was to (politely) point out that Ben is not immature (age 38) nor without investment experience (see bio).

 

Expanding on my previous thoughts (not so politely) it is obvious that this board contains not only some naysayers but those who question the integrity of the Watsa family. Consider-Prem’s payday is $600k per year for running a company with a market cap> $18b-ABSURD !

 

One way or the other Prem’s children will inherit and have to manage over $1b (or more) consisting mostly of Fairfax stock.Shouldn’t they (through Ben)have some idea what’s going on ? It is called skin in the game and being a member of the board is a great place to learn without screwing things up to badly.

 

I know that Fairfax farms out monies to be managed by many other investment companies not just Ben’s.It is called fresh ideas or different viewpoints.Do you really think that $50m was handed to Ben to manage like Monopoly money?  His employer has a lot more on the line than the management fees on $50m (reputation and future business come to mind).

 

Finally you have two choices Mr. Stubblejumper-1) Suck it up and confront Prem at the annual meeting with a list of your grievances (real or imagined)

                                                                              2) Sell your stock.( Betting on a horse when you doubt the jockey’s honesty and ability can only end in disaster)

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The purpose of my previous thread was to (politely) point out that Ben is not immature (age 38) nor without investment experience (see bio).

 

Expanding on my previous thoughts (not so politely) it is obvious that this board contains not only some naysayers but those who question the integrity of the Watsa family. Consider-Prem’s payday is $600k per year for running a company with a market cap> $18b-ABSURD !

 

One way or the other Prem’s children will inherit and have to manage over $1b (or more) consisting mostly of Fairfax stock.Shouldn’t they (through Ben)have some idea what’s going on ? It is called skin in the game and being a member of the board is a great place to learn without screwing things up to badly.

 

I know that Fairfax farms out monies to be managed by many other investment companies not just Ben’s.It is called fresh ideas or different viewpoints.Do you really think that $50m was handed to Ben to manage like Monopoly money?  His employer has a lot more on the line than the management fees on $50m (reputation and future business come to mind).

 

Finally you have two choices Mr. Stubblejumper-1) Suck it up and confront Prem at the annual meeting with a list of your grievances (real or imagined)

                                                                              2) Sell your stock.( Betting on a horse when you doubt the jockey’s honesty and ability can only end in disaster)

 

I think that is pretty rude. Thanks for stating the obvious. This is a free discussion here and nothing stubble said is out of bounds. Asking that question is not unreasonable given the recent vote consolidation. Remember even if ~1B is watsa family money, the vast majority of the market cap belongs to other shareholders. The fidjuciary responsibility is to them.

As to the 600k annual salary, that cannot be the defense of every action. Prem is free to take what he deems a market appropriate salary, but then would be judged on those metrics. He chose not to and I can see why given his large ownership stake.

All these questions do arise because for the past 8-9 yrs he has not distinguished himself during arguably the greatest bull market of many of our lifetimes. He was flat out wrong, and BV has suffered tremendously as a result even as he kept touting 15% PA as a longer term objective. Let's be clear, 8-9 yrs is not a short time either. Finally he has wagered pretty big on a market and economic turn upward at an interesting time in the cycle. In addition he has bet large ie over 50% large, on a couple of huge insurance acquisitions, on which the jury is still out. If the latter two things go against us, it would not be clear to me that his position is tenable, despite his fabled past.

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I place a lot of value on the culture, although I think SJ's distinction between culture and people is useful. There are elements of the culture I dislike (multiple voting shares being the prime culprit) but the people are impressive and retaining them says a certain amount about the culture I think I am right in saying that no Vice President has ever left except to retire.

 

Fairfax are also arguably one of the go-to providers of capital in India and Canada because of their long term style.

 

On the topic of Ben Watsa - I'm not bothered by their putting money out to manage by others (don't they have some with Sanjeev?). I do think they should provide full disclosure, though, if it is managed by a family member. I also think they should be clearer about Ben's likely role after Prem dies; my understanding is that Paul Rivett will inherit the throne, but there ought to be a plan for the votes.

 

 

Someone spoke highly of Mason Hawkins further up the thread. Here's what he had to say about the Fairfax team in 2011:

 

First, unlike Berkshire Hathaway, where Mr. Buffett is virtually the sole investor, Fairfax has a very deep team of exceptionally talented analysts and investors, and they are anchored like almost no other investment group that we know of in Ben Graham’s margin-of-safety disciplines.

 

This team is housed in a company called Hamblin Watsa. It has an over-30-year record. It is led by Roger Lace, who is its president and head of equities. Brian Bradstreet oversees their fixed-income investing. Another leader is Chandran Ratnaswami who leads their international efforts. Sam Mitchell, who has had a terrific long-term record at another company, is part of the Hamblin Watsa group. Paul Rivett is their chief legal officer and also adds insight.

 

In Fairfax’s case, there is clearly a coordinated, cooperating, and collaborating investment team. They have executed like no other. Prem is part of that team, but by no means oversees the day-to-day execution of their investing efforts. Their record is nonpareil. In the last 15 years, they have grown book value per share at 16.4%, versus a 6.8% growth rate for the S&P 500. They have the number-one record in the insurance world of growing book value per share over that 15-year period. Over the last five years, Fairfax has grown book value at 22.5%, also number one among insurance companies. That was a period when the S&P had a 2.3% return. They far and away have exceeded their peers.

 

Turning to their long-term investment record, over the last 15 years their common stock investments have compounded at 17.2%, versus 6.8% for the S&P 500. Their bond record is equally superb. Their bonds have compounded over the last 15 years at 10.0% versus only 6.2% for the Bank of America Merrill Lynch US Corporate Index. Both bonds and stocks over the last 15 years have outperformed, and they have records in those two asset arenas unlike anyone we have studied, including those in the insurance world, hedge fund, and investment advisory world. They have a history of thinking independently, applying their appraisals, and using their discipline to say “no” unless something is exceptionally attractive from both a risk and a return standpoint.

 

Their hedging activities are misunderstood, and, to your question, they are not “speculations;” they are enabling them to lock in their investment performance and to protect their liabilities with their assets. Fairfax is a unique company, and they have evolved into one of the leading investment groups in the world, overlying a group of much-improved insurance companies. They have evolved with terrific management in the insurance companies that the holding company oversees.

 

Look at the team of talents that leads each of their insurance companies: Doug Libby at Crum and Forster, Mark Ram at Northbridge, and Nick Bentley running their runoff business called River Stone. You see well disciplined managers that understand that insuring risk has to be done at reasonable cost and against reasonable potential claim exposure. Dennis Gibbs is still a consultant of theirs, and he may be one of the most sagacious insurance minds there is. Andy Bernard was just recently made president and COO of Fairfax Insurance Group. He previously ran OdysseyRe and created an exceptional company from virtually scratch. Now he oversees the various components of Fairfax’s worldwide and growing insurance group. As you probably know, they have nascent operations in many of the evolving world economies: India, China, the Middle East, and Eastern Europe. We believe that those early-day undertakings will pay great dividends as we go forward.

 

Fairfax is a combination of a superior investment team, with a lot of individuals who are very capable of running insurance companies and who have proven their worth and merit over a full cycle of insurance premium pricing. Prem has assembled a really unique group of operating and investing talent.

 

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The telltale sign of a companies culture is how well they retain the top employees. I think as long as these employees mentioned above stay on board, we can assume that the culture is intact. If they start to leave in droves, we can assume that something is afoot and we might be better of looking st selling.

 

Apparently FFH has traits of a family run business for the better or the worse. I don’t see this as a reason to change my investment thesis,  but it deserves to be monitored.

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The purpose of my previous thread was to (politely) point out that Ben is not immature (age 38) nor without investment experience (see bio).

 

Expanding on my previous thoughts (not so politely) it is obvious that this board contains not only some naysayers but those who question the integrity of the Watsa family. Consider-Prem’s payday is $600k per year for running a company with a market cap> $18b-ABSURD !

 

One way or the other Prem’s children will inherit and have to manage over $1b (or more) consisting mostly of Fairfax stock.Shouldn’t they (through Ben)have some idea what’s going on ? It is called skin in the game and being a member of the board is a great place to learn without screwing things up to badly.

 

I know that Fairfax farms out monies to be managed by many other investment companies not just Ben’s.It is called fresh ideas or different viewpoints.Do you really think that $50m was handed to Ben to manage like Monopoly money?  His employer has a lot more on the line than the management fees on $50m (reputation and future business come to mind).

 

Finally you have two choices Mr. Stubblejumper-1) Suck it up and confront Prem at the annual meeting with a list of your grievances (real or imagined)

                                                                              2) Sell your stock.( Betting on a horse when you doubt the jockey’s honesty and ability can only end in disaster)

 

 

Daphne,

 

With respect:

 

1) Ben was put on the board of directors when he was 35 years old.  That's a joke.  Look around and you'll look long and hard to find any other company that dedicates an outside board position to somebody with so little business experience and virtually no life experience.  Sorry, but it's true.  The fact that Prem owns about 7 percent of the economic interest of FFH doesn't mean that we should passively accept that his family members occupy board positions that should otherwise have gone to a more meritorious and experienced outsider (by the way, Ben's bio is what you would expect from a 38 year-old -- there are hundreds and hundreds of guys like him in Toronto, and thousands in NYC).

 

 

2) Prem's decisions about compensation were taken by himself.  No other shareholder suggested that he cap his salary at $600k.  As with many aspects of his life, Prem might be seeking inspiration from Omaha on his salary, but that was his choice.  As shareholders, all we ask is that he not portray himself as a selfless servant to FFH working for a pittance, and then shift money to his family using poorly disclosed preferential contracts.  Take appropriate compensation, but disclose it well.

 

 

3) Prem and his family definitely have skin in the game, which is mostly good.  However, it should never be forgotten that the Watsa family economic interest in FFH is only about 7%.  When Prem arranges a contract to have his son manage $50m of FFH's investments, $46m of that is OUR money and the Watsa family's economic interest is less than $4m.

 

 

4) Integrity is a matter of perception as much as reality and it is not a matter of degree.  If Prem is going to hold up the culture of FFH as something that is tremendously valuable, then he should at least walk the walk.  On that point, my opinion is that he has failed very badly over the past five years, particularly on the issue of modifying the terms and conditions related to his multiple voting shares.

 

 

In closing, I would state simply that Prem is a big boy.  This website is a well-known meeting place of FFH investors and if he has any interest on how they view FFH it's certainly not hard to find.  Every quarter he holds a teleconference and is effectively given an excellent platform from which he can address any of the concerns that are raised here. 

 

 

SJ

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I have no issue with a 35 year old being put on the board. In fact, I am all in favour of talented young people being put on accelerated development pathways - look at Tracy Britt Cool, and any number of people at the 3G companies. Nor do I have an issue with investment management being outsourced.

 

What I do have an issue with is family members being preferred without clear explanations to outside shareholders as to why it isn't nepotism.

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Daphne,

 

With respect:

 

1) Ben was put on the board of directors when he was 35 years old.  That's a joke.  Look around and you'll look long and hard to find any other company that dedicates an outside board position to somebody with so little business experience and virtually no life experience.  Sorry, but it's true.  The fact that Prem owns about 7 percent of the economic interest of FFH doesn't mean that we should passively accept that his family members occupy board positions that should otherwise have gone to a more meritorious and experienced outsider (by the way, Ben's bio is what you would expect from a 38 year-old -- there are hundreds and hundreds of guys like him in Toronto, and thousands in NYC).

 

 

2) Prem's decisions about compensation were taken by himself.  No other shareholder suggested that he cap his salary at $600k.  As with many aspects of his life, Prem might be seeking inspiration from Omaha on his salary, but that was his choice.  As shareholders, all we ask is that he not portray himself as a selfless servant to FFH working for a pittance, and then shift money to his family using poorly disclosed preferential contracts.  Take appropriate compensation, but disclose it well.

 

 

3) Prem and his family definitely have skin in the game, which is mostly good.  However, it should never be forgotten that the Watsa family economic interest in FFH is only about 7%.  When Prem arranges a contract to have his son manage $50m of FFH's investments, $46m of that is OUR money and the Watsa family's economic interest is less than $4m.

 

 

4) Integrity is a matter of perception as much as reality and it is not a matter of degree.  If Prem is going to hold up the culture of FFH as something that is tremendously valuable, then he should at least walk the walk.  On that point, my opinion is that he has failed very badly over the past five years, particularly on the issue of modifying the terms and conditions related to his multiple voting shares.

 

 

In closing, I would state simply that Prem is a big boy.  This website is a well-known meeting place of FFH investors and if he has any interest on how they view FFH it's certainly not hard to find.  Every quarter he holds a teleconference and is effectively given an excellent platform from which he can address any of the concerns that are raised here. 

 

 

SJ

 

+1  to everything stated above. It is important to remember that Watsa has been able to cement his control of FFH with only 7% of the shares. This is less than Wynn owned of his namesake company, yet Wynns board was able to boot him. Watsa’s control of FFH is disproportionate of his ownership and he should exert his powers wisely.

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Anyone who held shares in Fibrek when Resolute took them over back 2011 knows that the “Fair and Friendly” Fairfax motto applies only to Fairfax self interest.

 

However, I would reserve criticisms of Ben Watsa until someone can show evidence of his performance or lack thereof.

 

If he does a good job I don’t care who his father is. But until someone can show that he is doing a poor job it is a bit unfair to criticize him simply because of his age or who his father is.

 

As far as PW’s salary is concerned, how many other companies of Fairfax’s size has a CEO with a $600k salary? Sure he also gets the $10 dividend, but so do we.

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Anyone who held shares in Fibrek when Resolute took them over back 2011 knows that the “Fair and Friendly” Fairfax motto applies only to Fairfax self interest.

 

However, I would reserve criticisms of Ben Watsa until someone can show evidence of his performance or lack thereof.

 

If he does a good job I don’t care who his father is. But until someone can show that he is doing a poor job it is a bit unfair to criticize him simply because of his age or who his father is.

 

As far as PW’s salary is concerned, how many other companies of Fairfax’s size has a CEO with a $600k salary? Sure he also gets the $10 dividend, but so do we.

 

 

Yeah, I didn't want to say anything about the fairness of the Fibrek takeover or the insider trading charges that were lodged against Prem.  But, suffice it to say, it wasn't a bright and shining moment for anyone involved.

 

To be clear, I mean no criticism of Ben Watsa.  He's probably a good guy, and if intelligence is genetic, he's probably been blessed with a keen intellect.  No problem there.  The issue is whether Ben's appointment to FFH's board is truly in shareholders' interest or whether it's simply in the Watsa family's interest.  Without a doubt, spending time on that board will be educational and a valuable development opportunity for Ben.  But, that's not what outside shareholders need.  What we need is a bright and experienced businessperson who can contribute to the guidance of the company and provide counsel to Prem when he itches to do something wacky.  Prem needs to have a couple of older, experienced guys or gals who say, "Prem, why are you doing XXXX?  Does that really have a prospect to move the needle?  Are you managing risk appropriately?  Do you realise how the investment community will perceive this XXXX measure?"

 

In short, I want that the board positions be used to direct the company rather than to be used as career development and training opportunity for the Watsa progeny.  Similarly I want the financial resources of FFH to be used uniquely in the interests of shareholders (the term, "fiduciary duty" comes to mind) rather than for career development and training opportunities for the Watsa progeny (irrespective of how bright and talented they might be).  Ben might be the greatest guy since Peter Lynch, but don't try to develop his career on my nickel, particularly when his dad has plenty of personal resources to do so.

 

 

SJ

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Anyone who held shares in Fibrek when Resolute took them over back 2011 knows that the “Fair and Friendly” Fairfax motto applies only to Fairfax self interest.

 

 

Also not something I paid attention to. Could you give me a couple of bullet points?

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There is nothing wrong with bringing your kids into the business, and we have all kinds of examples in Canada's business dynastys. But they all work their way up, and they cut their teeth in the board positions of subs first. Elevating family too quickly isn't fair on them, your partners (shareholders), or the people that elevation displaced.

 

The reality is that at 7% ownership FFH isn't Prems company anymore, and succession planning is everyones problem - not just Prems. Calling him out on it was valid. Might it have been done better behind a closed door? Probably.

 

SD

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