Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism by Jefferson Gramm

Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism Reviews

• 
  Justas Šaltinis

  "If private equity does one thing well, it's governance. It's their money, they are not afraid to ask tough questions and to really understand the business and make the needed changes. Boards are notorious for waiting too long to rid of bad people. It's hard to pull the trigger on bad-performing CEOs."
  
  "Being smart about risk doesn't mean buying the best assets and ignoring the bad ones."
  
  "...CEO then secures his position by making sure his second in command is even dumber than he is, the corporate governing class evolves into a vast idiocracy."
  
  
  
• 
  Zhou Fang

  I listened to this on audiobook. Super interesting series of activist investing case studies, stretching from the time of Ben Graham all the way through the early 2000s with Dan Loeb and BKF Capital. The book is not only a treatment of successful activist campaigns but also the different approaches (friendly vs. hostile) and how activism evolved over time. It also shows some of the finer results of activism (such as Buffett's friendly suggestion that Amex pay the salad oil claimants to preserve its financial reputation which was the true source of value for the business) to some of the less value-creating ones (greenmail paid to Ross Perot just to have him exit the board despite GM's terrible record--although to be fair the blame is largely placed on GM's poor management). This is a great book for anyone who is interested in investing in general and the history of activist investing in particular.
• 
  Library of

  Well-written and highly interesting book. Below is my notes.
  
  Dear Chairman is about shareholder activism in the United States over the past century. The book is written by Columbia professor and fund manager Jeff Gramm and consists of eight studies based on investor letters, newspaper clippings and interviews. According to Gramm, the starting point for shareholder activism was Benjamin Graham’s collision with the Northern Pipeline in 1926. As America then became richer and shareholding more widespread, more and more disputes over corporate control broke out.
  
  STARTS OUT IN THE 1920S. In 1926, Benjamin Graham discovered that the profitable Northern Pipeline (NP) had $90/share in bonds while the stock price was $65. NP held its AGM in Oil City, Pennsylvania, far from the company’s headquarters – probably so that the board and management would get work undisturbed. Graham went there but had forgotten to pre-register his case and had to go home unheard. After working with major shareholders and after several rounds with the board, Graham got hold of two of five board positions. He then got the company to distribute the excess capital to the shareholders.
  
  THE SALAD-OIL SCANDAL IN THE 1960S. Buffett started his partnership in 1956, and experimented in the beginning with everything from activism to short selling and pair trades. A classic story is that of American Express’s (AE) salad-oil scandal that erupted in 1963. The share price fell sharply and Buffett realized that the scandal did not damage AE’s highly profitable core business and invested 40% of the partnership’s capital in the company. He then began to persuade management and the board not to fight against the compensation of the swindlers. Legally, AE did not have to pay any compensation and shareholders loudly began to complain that a payment would still take place. Buffett realized that a lack of compensation could damage AE’s good brand and customer confidence and in the long run overthrow the company. If they took a big “one off”, AE would quickly be on the track again – which got to be the case.
  
  THE RANSOM LETTERS OF THE 1980S. The 1980s were the decade of “corporate raiders” and the big names on Wall Street were Carl Icahn, Michael Milken and T. Boone Pickens. “Bear hug letters” (an unwelcome but generous takeover bid), greenmail (targeted buyouts by individual shareholders), hostile takeovers (takeover attempts without board / management approval) and poison pills (a protection against hostile takeovers – often via the articles of association) were new words used extensively in the financial press. The activist investments of the decade were to a large degree made possible by cheap capital from Michael Milken. He was the “father of junk bonds” (high-yield bonds with little security) and through this built up a fortune. After a too long time in the grey zone, the happy 1980s resulted in 10 years in prison and a $600m fine for Milken. In the end, however, he came out after only two years.
  
  THE TOWN-HANGINGS OF THE 2000S. In the late 1990s and early 2000s, hedge fund manager Daniel Loeb introduced a new type of activism – public shaming. Loeb’s approach was to take a position of power in problem companies and replace inefficient management to reverse the negative development. To get the attention of key people, he sent out open letters in which he clearly expressed how management exploited the shareholders through passivity, dishonesty, or laziness. The open letters contained everything from personal attacks to curse words and proved to be highly effective. Loeb had found the key point of key people – if there is one thing CEOs and board members care about, it is their reputation.
  
  ”Sometimes a town hanging is useful to establish my reputation for future dealings with unscrupulous CEOs”
  – Daniel Loeb
  
  ACTIVISM IS NOT ALWAYS A GOOD THING. Studies have shown that activism is generally value-creating. However, not all outcomes will be good. Gramm takes up the example of BKF Capital, where activists ran a marginally profitable fund company into non-existence. The activists felt that earnings were burdened by unusually high staff costs and saw potential for quick gains if wage levels were trimmed. But when wages were reduced, the staff disappeared and with the staff, the investors disappeared. The fund company’s AUM fell rapidly and after only a few years the business was wound up.
  
  ACTIVISM AS AN ASSET CLASS. According to Gramm, activism entered the institutional world in the late 1980s after GM, through greenmail, bought out major owner Ross Perot. The purchase took place at a large premium and Perot’s billion profit was financed at the expense of other shareholders. Thereafter, the major institutional shareholders increasingly began to side with the activists. It was also in connection with this that greenmail was banned. Nowadays, even normally passive institutions are open to follow successful activists.
• 
  Héctor Pastor

  The best book yet on the subject of Activist Investing.
• 
  Shaun

  I received a copy of this book for free through a Goodreads First Reads giveaway
  
  Dear Chairman... is a history book on shareholder activism. If you don't know what that is, Gramm does a good job of walking you through it. The book chronologically presents you with what amounts to case studies. The basis of each chapter lies in a letter, written by mainly by fund managers and stockholders to boards of public companies and/or other stockholders. Each of the letters are printed in full in the appendix of the book.
  
  Gramm then goes on to explain the background of what that particular letter addresses and the impact it had (or continues to have) in the world of public company management and the stockholders of those public companies.
  
  In the introduction, Gramm points out that the book is about the history and impact of these letters/events and does not address the overall issue of "if" or "how" capitalism works and if it is either good or bad in how it is currently operated.
  
  In summation, the history is interesting. I think the book is more geared towards those that have a general (or higher) understand of how public companies and the stock market work, however it is not imperative to know. I have a very, very basic understanding and was still able to follow the content quite easily. The writing is plain and detailed. It's clearly a well researched book complete with notes on sources. The writing can get a bit complex at times and some did go clear over my head, but I was still able to understand the overall point(s).
  
  History buffs, in the stock market in particular, will be the target audience for this book.
• 
  University of Chicago Magazine

  Jefferson Gramm, AB'96
  Author
  
  From the author: "A sharp and illuminating history of shareholder activism in the United States, Dear Chairman has been praised as 'a terrific read' by Andrew Ross Sorkin in the New York Times, 'a revelation' by the Financial Times, 'a grand story' by the Wall Street Journal, and 'an engaging and informative book' by the New Yorker. It was named one of best books of 2016 by the Financial Times.
  
  http://www.dearchairman.com/press. Jeff graduated from the U of C with honors in December 1996."
• 
  Neil

  An interesting, if light-touch survey of shareholder activism through the years. I enjoyed it. It provides a gestalt, through the lens of a number of notable shareholder letters to corporate boards, beginning with Ben Graham. It is not encyclopedic and isn't intended to be.
  Still, it is an entertaining and enlightening contribution to financial history.
• 
  Jay

  This is a well-written, well-researched glimpse at the history of shareholder activism, corporate raiding, and the conflict between business shareholders and managers. It's a nice look outside of theory and into the messiness of business. All that being said, it's also a fairly dry topic for a regular person.
• 
  Tomas Krakauskas

  "Dear Chairman" is a great historical summary of shareholders activism, iliustrated by real case studies from different decades. I really liked that in the end of the book author provides original copies of shareholders letters to company chairman or CEO. Too my mind this book can interesting and most useful only for experienced investors.
• 
  Trung Nguyen Dang

  Overall, it's a enjoyable read about 8 detailed cases of shareholder activism, which include: Benjamin Graham, Warren Buffett, Dan Loeb, Carl Icahn.
  
• 
  Rafael Lucas

  Very interesting selection of letters from some of the best activist investors - from 1927 to 2007 pointing out the evolution of their mindset and "attack" style.
  The book also gives a good view on the market and corporate governance evolution to the point where we got today.
  
  
  1. Graham vs. Northern Pipeline: demanded that excess capital on the balance sheet be distributed in dividends. Market didn't have much information on the financials so no one saw it. Management controlled the board. Graham didn't run a proxy fight but changed the board position - most of it happened because the Rockefeller Foundation (who was a large shareholder became active).
  1. Why was shareholder activism so rare in the early twentieth century? i) public companies were controlled by very few persons (founders, family owners and entrepreneurial shareholders). ii) very little financial information available, difficult to value companies. iii) what really drove markets were rumors and inside information.
  2. Robert Young vs. New York Central: first of Young's proxy fight (especially using the media to rally smaller shareholders). The board was dominated by bankers and directors who used it for their own purposes (big contracts and fees).
  1. Main points: i) the need for an ownership board instead of a bankers dominated board. ii) poor operating performance and dividend record versus directors fees. iii) Youngs new vision for the railway business - good for the customers.
  2. Young writes: "Just ask yourself why the four bankers on the present board, together owning only 450 shares of the Central, are so determined to hang on to your company. Is it because of the substantial benefits which have accrued to their four banks [...] Would you rather have large owners on your board whose interests parallel yours or bankers with nominal ownership, many of whose interests conflict with yours?".
  3. The easiest way to accomplish huge open-market share purchase was the hostile tender offer. When the proxy fight gave way to the hostile tender, the proxyteer was replaced by the corporate raiders.
  3. Warren Buffet vs. American Express
  1. American Express was guaranteeing as last resort lender the assets of Allied (Salad Oil company). They got caught up on a scandal in 1967 with their largest client that didn't actually have the products.
  2. Warren Buffet who was an important shareholder supported management to sail though the storm. He believed that the major business of the company was credit card operations and the brand on B2C wouldn't be affected by this scandal.
  4. Carl Ichan vs. Phillips Petroleum
  1. Carl Icahn one of the most important corporate raiders sent a letter in 1985 to Phillip Petroleum offering to buy the company for $8.1bn finances by junk bonds issued by Drexel (Milken)
  2. "America's fourth great merger wave proved to be much more substantial than its conglomerate-driven predecessor. The 22,000 M&As of the 1980s deal decade included leverage buyouts by PE, strategic acquisitions by corporations taking advantages of tax antitrust enforcement, and expansion into the US market by international companies. But it was the hostile takeover, though they made up only a small percentage of the decade's deals, that defined Wall Street in the 80s."
  3. "While the Proxyteers struck fear into the hearts of CEOs with their ability to harness the discontent of public shareholders, the corporate raiders had something much more powerful at their disposal: ready cash. It came from Michael Milken and the vast market he created for new-issue junk bonds. Milken used his network of high-yield buyers to create a liquidity boom for young takeover artists."
  4. Milken's machine was an aberration that created a bubble using securities violations and abuses. He was incarcerated and permanently barred from the industry. But the raiders that used his financing and services became some of the stars of the corporate raiders era.
  5. Carl Icahn strategy was to 1) buy a large amount of shares of the company that was undervalued. 2) try to convince management to liquidate the company or sell it to a "white knight". 3) wage a proxy fight. 4) make a tender offer. 5) accept greenmail from management and sell the position back to the company at a premium over minority shareholders.
  6. Poison pills: created in 1982 by Martin Lipton, in a typical poison pill a company gives its shareholders special rights that are triggered when a buyer crosses a certain ownership threshold. The trick is, once the threshold is crossed, the rights are exercisable for everyone except the buyer, therefore diluting the buyers ownership stake. It doesn't prevent the company from a hostile takeover, but it blocks raiders from buying effective control on the open market or stampeding shareholders into a front-loaded tender offer.
  7. "After suffering several years of egregious greenmails and costly entrenchment tactics, institutional investors were teetering on the edge of rebellion. By the end of the decade, many large institutional investors were doing their homework. They ran proxy fights, questioned management teams as well as hostile raiders, and formed opinions on sophisticated corporate governance issues. Whit Milken's fund-raising machine shut down and historically passive institutional investors finally using their brains, the last great hostile raider era was over."
  5. Ross Perot vs. General Motors
  1. On 1985 Perrot sent a letter to GM's Chairman challenging his autocratic management style and the bad investments the company was doing in technologies that weren't useful while Japanese manufacturers were becoming more and more competitive with low cost, high quality cars.
  2. "Instead of planning for the future and responding to competitive threats, GM's senior management was holed up on the fourteenth floor, micromanaging its division and debating unimportant issues."
  3. After accepting greenmail Ross Perot sent the bellow open letter to management:
  1. "At a time when GM is: closing 11 plants, putting over 30k people out of work, cutting back on CAPEX, losing market share, and having problems with profitability. I have just received $700m from GM in exchange for my class E notes and stocks. I cannot accept this money without giving the GM directors another chance to consider this decision... if the GM directors conclude that this transaction isn't in the best interest of the company and its shareholders I will work with GM directors to rescind the transaction."
  
  
• 
  Bruno Taveira

  A great book with great stories and great business lessons.
  
  The author cherry-picked the stories not to broader or maximize the lessons, but the general view of the reader by exemplifying: (i) how activism investing evolved over time, (ii) the many different approaches and (iii) the two possible outcomes.
  I would love to find cases picked by the relevance and deep of the business lessons withdrawn from them.
  
  The story starts with a tale of Benjamin Graham, the father of value investing, trying to convince the management of Northern Pipeline of the obvious: the holding of financial securities on the balance sheet was tax inefficient, thus the company should pay in dividends most of its cash. Back then, even a titan of investing, such as Graham, didn’t have his tool-box of thought the human biases so commonly talked about today. Management was unwilling to distribute the cash because it would leave them with a smaller and less capitalized company. There was an obvious conflict of interest between management and shareholders. For most investors nowadays, this is a no-brainer, what shows the great lengths we’ve come to have the corporate governance common nowadays. It also reminds us that some behaviors which we accept right now as “just the ways things are” and “every company does/is like this” will likely be unthinkable one day. Investors should never be afraid to ask questions and never accept “in all the other companies, things are like this” as an answer.
  
  The book goes on with the proxy tiers of the of the 50’s, Warren Buffet, the corporate riders of the 80’s and, finally, the activist investors of the XXI century.
  
  My take-ways:
  - There is no right or wrong structure or source of funding for activism investing: there were successful activist investors using holding companies, hedge-fund, distress debt, etc;
  - Though activist investors are notorious for news worth fight-to-the-death-in-a-cage, a la Bill Ackman and Herbalife, it is better to go through out your career building alliances, a la Buffet style, instead of making enemies, coincident or not, history shows that guys who spend their activist investors’ careers putting up a good fight end up somehow being berried;
  - The first thing to do is a change in management: the book is composed of eight cases of companies in distinct situations, in diverse sectors, through the course of one hundred years, in none of them investors managed to convince the management to be on-board with changes;
  - Activism investing is a doubled-edged sword: it can unlock great value or destroy the company.
  
• 
  Sam

  This is a well written examination of the history of investor activism in America through the letters written by shareholders to boards encouraging them to change policy or management. I am definitely not Gramm's intended audience and I only read it to get a better understanding of the way wealthy investors view the world. I did, and I find the perspective repellent.
  
  The entire time I was reading it, I was trying to figure out why I had such a visceral dislike of all the characters discussed and the author himself. It finally occurred to me toward the end that I loathe the use of democratic language of rights and duties being entirely dependent on the person's or entity's ownership of capital. I think it's this idea that someone or business is entitled to power shaping public policy solely because they are wealthy is a large part of why our political culture has become so perverse and depraved. Reading this book, I can better understand why billionaires and large corporations behave as if society owes them something -- because they are convinced that it's true. This is an excellent unintentional exploration of how money corrupts the mind and attitude one has toward one's rights and responsibilities to others.
• 
  Jessica Burstrem

  This is an incredibly well-written book. It mostly reads like an investing history book for a popular audience, although occasionally the author uses investing jargon without explaining it. I can't fault him for just that, though. His research and knowledge are impressive. His acknowledgements and criticism of explicit and implicit sexism in one chapter increases his credibility. And he is often entertaining and even funny, when appropriate. I really enjoyed reading the book, even the parts that didn't pertain to my own research purposes, and found myself eager to get back to it whenever I had to step away. He achieves exactly what he set out to do: to “understand the rise of the shareholder” (x), “explain how shareholder activism works” (xiii) to facilitate more informed investors (199), and evaluate “the wisdom of particular campaigns” (xv). He also strives to make it clear that there is no simple "checklist" of attributes or circumstances that makes for an ideal board of directors, as independence is a "knotty" and nuanced notion, and there are often contradictory goals for such a body anyway. Consequently, he posits the ideal situation as one in which all relevant parties, including shareholders themselves, are attentive and involved.
• 
  Lee

  Gramm takes a dry subject, shareholder activistism, and weaves stories that show readers why what he and other activist investors do matters. He does so by narrating a handful of boardroom battles with bad management tangling with concerned shareholders, all the while explaining what stock owners should do (owning stock is an active act, he claims, not a passive one).
  
  Some of these stories are ripe for film adaptations, like the daughter of the founder of a company who marries the man who becomes the CEO. As her marriage falls apart, she realizes her husband is running the company as a club for his friends and so she takes him on, defenestrating his clique and restoring the health of the company her father founded by selling it off.
  
  Even if you're not business-minded, consider this for beach reading. Makes for a surprisingly fascinating step into the C-Suite.
• 
  Tauri Laane

  It was funny to listen that a century back they fought for shareholder rights getting part of the profits as "Aunt Mary's" savings. Well, no Aunt Marys as shareholders any more today, only the rich getting richer in US. But the book was a good wake up call: if at any time You are leading a company that has shareholders and their value is too low compared to the real value to the company, it will activate some professional vultures that have a lot of tricks to manipulate and lie to get the company assets sold off. Before reading the book I thought that a business with spare money is a good organization, but those vultures see this "spare" excess money as a resource to be grabbed away (and to invest in somewhere else by their own choosing). So in future I will make an effort to hold the share value at least as high as the real value - so I'm not a shiny target for any capital vulture.
• 
  Hetal

  This an excellent book that contains 8 curated letters written by investors to corporate boards. Through the letters and the backdrop within which these were written, the books takes the reader through the history of shareholder activism in USA. While the letters themselves form a piece of history of the development of financial markets, their backstories make for intensely interesting reading. The letters - including those written by Warren Buffet, Dan Loeb, and a set of others - cover different aspects of shareholder and corporate behaviour. The book is balanced and also talks about some of the pitfalls of shareholder activism - it isn't only about asserting rights. This is a book worth reading for those on the buy-side and the sell-side. I absolutely loved it.
• 
  Jon Angell

  I did enjoy the stories ... I find the world of publicly held companies and their management extremely interesting... I received a complimentary copy of this book from the author indirectly. He was scheduled as a keynote speaker at a conference I attended this year outside of Chicago. A family emergency caused him unable to speak, and as a way to make it up to attendees he saw that each received a copy of his book. After reading the book, which I enjoyed and appreciated, I can't help but think how great his presentation would have been.... I found the boardroom battles and shareholder activism stories and commentary valuable and has given me some historical background in which to relate to the current and future investing events I will certainly witness....
• 
  Brian

  I picked this one up at the Berkshire Hathaway conference last year. It was excellent and highly recommended for anyone in the investment or banking worlds.
  The storytelling is excellent and traces a path from Benjamin Graham to Carl Icahn today and the inventions, successes and failures along the way of those who ensure that publicly traded companies actually do the right thing for their owners.
  The only reason I'm giving this four instead of five shares is that sprinkled, seemingly at random, in the chapters are a lot of good insights about corporate governance today. I didn't see the logic to how the insights were organized and would have a hard time going back to find them later.
• 
  Tag

  Interesting book touching on the brief history of shareholder activism - from Benjamin Graham, to the “Proxyteers”, to the hedge fund managers with some appalling examples of poor corporate governance. The book publishes actual letters and used 8 real cases to provide valuable insight on the different reasons for shareholder activism (inefficient capital allocation, misalignment of incentives, pure incompetence). The book ends with an example on how shareholder activism failed to produce a good outcome for shareholders (BKF capital). It becomes clear that the entrenchment of CEOs and their boards is not just a problem of the past. Overall a good business book to read leisurely.
• 
  Jim

  An interesting look at the evolution of shareholder activism since the early 20th century, as told through several case studies with copies of actual shareholder letters that were sent to the board chairmen involved. This book helps add context and background to some of the most publicized boardroom battles in recent years. The author, who admits he is not a professional author, nonetheless chronicles each story in an easy-flowing, down-to-earth, and simplified manner that will appeal even to those who might not have an extensive business or investing background.
• 
  Dave S

  Published in 2015, “Dear Chairman” is one of the few finance books dedicated to the (history of) shareholder activism. It has not occurred to me that Ben Graham and Warren Buffet could be considered as activists. The chapters on Karla Scherer and the BKF Capital were beyond fascinating. The one about Dan Loeb was very informative about the rise of the activists in the first decade of 21C. With growing emphasis on ESG - Carl Icahn’s proxy on MCD’s pigs was very intriguing - I look forward to reading Gramm’s next book!
• 
  Frédéric Bonin

  Solid read. I learned a lot reading this book. It was thoroughly researched, well written and surprisingly easy to read. My main problems with it are that at nearly $30 and 200 pages (plus reprints of old letters and notes) I felt like it was a bit light on content and/or value as well as the lack of recommendations or « insights » which the author acknowledged himself in his concluding remarks.
  
  I still recommend the book to all finance/capital markets nerds as it is a good read and the footnotes alone are a treasure trove of further readings.
• 
  Eric

  A superb album of snapshots into shareholder activism across the decades. Dear Chairman does not have the analytical depth of business school cases, nor does it engage with the (voluminous) relevant academic literature. Still, Gramm's engaging commentary about the vignettes and surrounding business environment make this a wonderful read for anyone interested in shareholder rights, shareholder activism, or management entrenchment.
• 
  Daniel Deptula

  Well-narrated commentary of activist battles against entrenched boards, who usually placed their own interests ahead of shareholders.
  
  Particularly enjoyed the chapters of Ross Perot vs GM and Dan Loeb. Loeb clearly has a knack of making very pointed comments about a person's behaviour and decisions.
  
  Even if you have limited interests in the content of the book, you can definitely gain some insight into how to write strongly-worded emails :D
• 
  Sy. C

  Underwhelming - essentially a disjointed collection of short stories, resembling magazine articles or Wikipedia entries, on various well known investors, some of which are not even representative case studies of shareholder activism. Lacking in cohesion or original insights. Would be fine coming from a journalist but very disappointing considering the author's purported background in investment management. Not worth the time for experienced investors.