Street Capitalist: Event Driven Value Investments

In an ideal world, managers at corporations would listen to the ideas that shareholders bring to them. After all, the shareholders are the true owners of a company. Usually though, egos start to fly and things don’t work out that way. When that happens, shareholders often utilize proxy contests in order to replace members of the board of directors and make their voices heard. The problem is that these proxy fights are messy and expensive. You have to obtain extensive legal council and take on the costs of actually mounting a campaign to distribute ballots and get votes yourself. For smaller investment funds the fight just might not be worth it.

The reason I bring this up is that there seems to be a little controversy regarding Sardar Biglari’s reimbursement of $500,000 from Steak N Shake (NYSE: SNS) while also serving as CEO of Steak N Shake (and taking a salary).

In connection with his appointment as Chief Executive Officer of the Company, Mr. Biglari’s annual salary was increased to $280,000. There is no other plan, contract or arrangement to which Mr. Biglari is a party or in which he participates that was or will be entered into, or any material amendment to such a plan, contract or arrangement, in connection with Mr. Biglari’s appointment as Chief Executive Officer. Mr. Biglari does not receive board fees or any other compensation.

On August 6, 2008, the Company’s Board of Directors agreed to reimburse Western Sizzlin and the Lion Fund for expenses related to this year’s proxy contest in the amount of $500,000. Mr. Biglari serves as the Chairman and Chief Executive Officer of both Western Sizzlin and the Lion Fund. This expense reimbursement is being disclosed pursuant to Item 404(a) of Regulation S-K.

Form 8-K for STEAK & SHAKE CO (Yahoo!)

While this looks sketchy, it’s not. Back in January, Biglari publicly disclosed that he would be seeking reimbursement for expenses incurred by having to wage a proxy contest with Steak N Shake. He says here:

The expense of soliciting proxies is being shared pro rata by the Lion Fund, Western Sizzlin and Western Acquisitions based on their pro rata share of the aggregate number of Shares held by all members of the Committee. Costs of this solicitation of proxies are currently estimated to be approximately $[________]. The Committee estimates that through the date hereof, its expenses in connection with this solicitation are approximately $[________]. We intend to seek reimbursement from the Company of all expenses we incur in connection with the solicitation of proxies for the election of the Nominees to the Board at the Annual Meeting. We do not intend to submit the question of such reimbursement to a vote of security holders of the Company.

Preliminary proxy statements, contested solicitations (Steak N Shake)

Had Biglari pulled the reimbursement out of a hat, as a shareholder I’d be angered. But he didn’t. When he began his proxy contest with the company he publicly disclosed that he would seek reimbursement. If shareholders had disagreed with this, they could have voted in favor of company management.

In general, I like to see these reimbursement policies in play. They are enablers for shareholder activism which means that even in the micro-cap/small-cap area, we can see corporate management held accountable to their shareholders.

Today Steak N Shake (NYSE SNS) annouced that Sardar Biglari will serve as Chief Executive Officer:

Mr. Biglari commented, “I would like to thank Wayne for his guidance over the last several months. In reviewing Steak n Shake and beginning to implement its restructuring, the Board and I concluded that to achieve the best results, we need an executive who will be focused on restaurant operations. As a consequence, we will seek a president with significant restaurant experience to concentrate on improving restaurant operations, whereas I will assume the CEO position, leading the organization principally from a strategic, financial, and governance perspective. Concurrently, we are presently undergoing a comprehensive examination of the company and are in the process of implementing a restructuring program — closing underperforming locations, reducing G&A, shortening hours of operation in many locations, and other initiatives — all on the premise that Steak n Shake will be managed based on cash flows in order to create long-term value for shareholders. Steak n Shake is an iconic brand with greatly talented people working throughout the organization. Because of all these advantages, I am confident we will regain the chain’s prior status as a great company. Details of our plan will be disclosed within the next 60 days in a shareholder letter.”

The Steak n Shake Company Announces Change in Leadership (Yahoo)

My reaction to this change is positive but mixed. Biglari became chairman with the intention of helping influence the board into finding someone to run operations for Steak N Shake (SNS). The fact that this has not happened is a little disappointing, but I know that Biglari is working 17 hour days and he has already had a positive effect at the company (steering SNS to tax savings). I’d rather that we patiently wait for the right president to be found. We’re going to need someone good in order to excel in this kind of economic climate.

One thing I’m wondering is whether we’ll see a merger between Steak N Shake (SNS) and Western Sizzlin (WEST). It would be a little similar to what Eddie Lampert did with Kmart and Sears. The same could happen with Steak N Shake with Western Sizzlin since both are in the restaurant industry, we could see some cost savings and synergies achieved by merging. Although getting the financials to work out, especially currently, would be a major stretch.

Looks like the management at Steak N Shake (SNS) have taken a step in the right direction:

NDIANAPOLIS, June 19 /PRNewswire-FirstCall/ — The Steak n Shake Company (NYSE: SNS - News) today announced that its current board member, Sardar Biglari, has been appointed Chairman of the Board of Directors, replacing interim Chairman Wayne L. Kelley. Mr. Kelley will remain on the Board of Directors and will retain his position as Interim Chief Executive Officer until the Company concludes its search for a permanent Chief Executive Officer.

The Steak n Shake Company Announces Appointment of New Chairman of the Board

Naming Sardar Biglari as chairman of the board of directors is a good start. He should be able to command more influence with how the company is run and this is a sign that management is being more proactive to the ideas of shareholders.

Since the announcement in February, investors have been looking forward to Carl Ichan’s blog The Icahn Report. Finally, after being bogged down by antsy lawyers, the blog is live. From the initial posts on the blog, it looks like Icahn will focus on critiquing the poor corporate governance of today’s companies.

Icahn is an investor we can learn from, many of the situations he involves him in are inherently event driven, where he focuses on pushing management towards value creating initiatives like spin-offs and breakups, see: Temple Inland (TIN).

Here is what Icahn has to say about poor corporate boards:

When you rid a company of a fruitless board, the rewards are often enormous because the underlying company and its employees can be excellent. It is the top level management that hangs like an albatross around the company’s neck. Years from now historians will marvel why we the shareholders – the legitimate owners of companies – did not do something effective about removing terrible managements. We can do something about the current situation. I will discuss in future entries how simple it can be and what has constrained us from taking action.

Corporate Democracy is a Myth (Icahn Report)

One of my own holdings, Steak N Shake (SNS) is currently held hostage by the kinds of machinations perpetrated by poor corporate boards that Icahn describes. At Steak N Shake, management enacted a change in the bylaws to require an 80% vote of the shareholders in order to call a special meeting (before it was only 25%). The result of this is a board that is difficult to change and the promotion of a corporate culture based on excess and value destruction.

While I doubt that a blog will be able to do much in terms of changing corporate governance, maybe it can stimulate some discussion of governance with the public and nudge management towards being more proactive to their shareholders.