Biglari Holdings Special Shareholder Meeting - August 13th

[Parsad]

It looks like the shareholder meeting for the compensation proposal is on August 13th, and is open to shareholders on record as of July 12th.  Sardar said he was going to write the proxy circular himself, and he lays out his case.  No mention of my biggest concern against the proposal...that the capital is captive inside a corporate structure.  I'm guessing this thing will pass, but certainly it won't be anywhere as unanimous as it was on the name change.  Cheers!

 

http://www.sec.gov/Archives/edgar/data/93859/000092189510001065/pre14a07428_07062010.htm

[Ballinvarosig Investors]

http://www.sec.gov/Archives/edgar/data/93859/000092189510001065/pre14a07428_07062010.htm

Thus, the Committee resolved that per-share book value growth is the most valid measure of the progress of the business because book value includes operating earnings/losses as well as unrealized gains/losses on investments.

If this is the case, why is he being compensated on simple book value growth?

[Guest Bronco]

I didn't read the proxy, but I don't mind book value growth as a metric.  What is outrageous is the amount he gets to keep. 

 

What Buffett did was buy as much as Berkshire as possible with his own money.  Then he got rich (well, more rich) by the stock going up.

 

Biglari is buying shares with other people's money, gaining power, and trying to vote himself to wealth.  It stinks from any way you look at it.

 

Truly a shame - this would have been an interesting story to follow had Biglari really tried to emulate Buffett.  But it was all a facade.

[Christopher1]

At least he addressed the "insider trading" suspects about the selling of his capital balance of Biglari Corporation before the incentive bonus news:

 

"On April 30, 2010, the Company announced that it had entered into an agreement with Mr. Biglari to purchase his entire interest in BCC for $1.00, exclusive of the adjusted capital balance of BCC through the date. The majority of the proceeds from the adjusted capital balance — net of taxes — Mr. Biglari reinvested in the Lion Fund, thereby increasing his investment as a limited partner. His reinvestment in the Lion Fund came on the same valuation date, April 30, 2010"

[Partner24]

and is open to shareholders on record as of July 12th.

 

I wonder what would have happened if he would have done that before. I guess a lot of shareholders have already voted with their feet.

[shalab]

Biglari is set to make good money once this passes. SNS book value increased from $23/share in 1994 to $215 in 2007. A compound rate of 18.75%  Biglari doesnt have to do much to earn good compensation.

 

 

[Guest ValueCarl]

Sanjeev, I seem to have missed your earlier explanations surrounding this compensation structure's fallacies. I am also not able to garner too much from this comment.

 

Please explain. tia

 

<that the capital is captive inside a corporate structure.> 

[Parsad]

Sanjeev, I seem to have missed your earlier explanations surrounding this compensation structure's fallacies. I am also not able to garner too much from this comment.

 

Please explain. tia

 

<that the capital is captive inside a corporate structure.> 

 

Hi Carl,

 

Sardar's main argument for implementing the new compensation package is because he sold Biglari Capital and the Lion Fund to BH, and he would be giving up the potential income that he could have generated with his reputation from those businesses, for a $900K salary which he was now earning at BH. 

 

The problem is that in his hedge fund, the investors could pull all their capital if they were unhappy, and he would have to look to raise new capital from other investors.  In the corporate structure, the capital is permanent...shareholders can sell their shares to others, but the capital Sardar has to work with is now permanent or captive.  That means he can take a long-term view when allocating capital without facing large scale redemptions.  That is a very significant advantage relative to managing capital within the hedge fund structure.  If Sardar had a higher hurdle and lower incentive fee, then I would have less of a problem with the compensation plan.  I think a 10% hurdle and 15% incentive fee would have been fair. 

 

The other issue that I think is very significant in a corporate structure, but not in a hedge fund structure is what effect will this type of compensation package have on the culture of the company.  If I was an executive who worked hard for Sardar and helped manage most of the enterprise with him, I might have a real problem five-ten years down the road watching him reap huge incentive fees, while my work is rewarded with a fixed salary.  This could create a problem with succession if something ever happened to Sardar.  If you alienate all your best employees, who is going to run this thing if something happens to you?  I think some of the top executives will want to go do the same thing at some point. 

 

At Berkshire or Fairfax, the CEO is paid far less than some of the other key employees, but they own a significant amount of the stock and votes.  This culture tells the executive team that the CEO values their work, but leads them by example...if I'm working for $600K as CEO, then you should be happy with $1M a year!  It may not seem like much, but it works.  And with their large ownership stakes, it teaches the executives to be owners with shareholders, not simply employees.  Little things, but they mean so much!  Cheers!

[Guest ValueCarl]

Might the double edged sword be his ability to gain greater control of the corporation inside of this lop sided compensation scheme, as a result of an increasing book value during bear market phases, whereby the stock price is excessively low notwithstanding(multiple effects), giving him an unfair advantage in accumulating a greater ownership stake in the enterprise?   

[tiddman]

Biglari already has enormous incentive to increase BH's value.  He indirectly owns 15% of the company worth around $60M.  He acquired more than 95% of this with other people's money.  This is plenty incentive for him to grow the business.  He doesn't need to take capital from shareholders in addition.

 

The proxy says that BH has $130M in AUM.  He has enough to buy up 25-35% of the stock if he really wanted to.

[OracleofCarolina]

Wonder if Gabelli can get Blackrock and DFA to vote

against..thats 25%

[treasurehunt]

I saw the following in the proxy filed by BH (I have bolded the sentence that concerns me):

 

The Governance, Compensation and Nominating Committee (the “Committee”), which consists entirely of outside, non-employee directors of the Corporation, has approved, subject to shareholder approval, and recommends to our shareholders the approval of the Incentive Bonus Agreement attached to this proxy statement as Annex A (the “Incentive Agreement”). We are asking shareholders to approve the Incentive Agreement only for the purpose of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”). Sanctioning the Incentive Agreement will enable the Company to preserve the tax deductibility of the compensation payable under the Incentive Agreement.

 

This paragraph makes it sound like the incentive bonus agreement will be in place whether or not shareholders vote in favor. If the vote goes against the agreement, shareholders will get insult added to injury in the form of BH not getting tax deductibility for the compensation. Please tell me I am wrong -- I feel like I am in a bad horror movie here. :-)

[rkbabang]

The Governance, Compensation and Nominating Committee (the “Committee”), which consists entirely of outside, non-employee directors of the Corporation, has approved, subject to shareholder approval, and recommends to our shareholders the approval of the Incentive Bonus Agreement attached to this proxy statement as Annex A (the “Incentive Agreement”). We are asking shareholders to approve the Incentive Agreement only for the purpose of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”). Sanctioning the Incentive Agreement will enable the Company to preserve the tax deductibility of the compensation payable under the Incentive Agreement.

 

This paragraph makes it sound like the incentive bonus agreement will be in place whether or not shareholders vote in favor. If the vote goes against the agreement, shareholders will get insult added to injury in the form of BH not getting tax deductibility for the compensation. Please tell me I am wrong -- I feel like I am in a bad horror movie here. :-)

 

OMG, that is exactly what it sounds like.  He's going to pay himself by the terms of the incentive agreement whether the shareholders approve or not.

 

I've already sold most of my BH, but I kept a hundred shares figuring I'd let them ride, vote them against the proposal, and see what happens. I'm thinking about getting out completely now. This guy just can't be trusted.

 

--Eric

 

[Parsad]

Yes, that's what that paragraph sounds like.  I sure hope that isn't the case, as that would be a real f**k you to shareholders.  The only other thing I've heard of as grievous was Frank Stronach's deal to sell his multiple voting shares this year.  Talented guys, but awfully greedy behavior!  As mentioned in our 2nd quarter letter, we are completely out of BH...we had to walk with our feet after watching all this happen.  Cheers!