Given a choice between incumbent directors and a slate of nominees from activist investor Groveland Capital in the Biglari Holdings proxy fight, a proxy advisory firm made a curious recommendation: Neither.
Institutional Shareholder Services, one of the proxy advisory firms whose recommendations are closely watched in board elections, recommended that Biglari Holdings Inc. shareholders “do not vote” for Groveland’s nominees and “withhold” votes on each of the six incumbent directors.
While ISS agreed with Groveland’s arguments that change is necessary at the San Antonio-based owner of Steak n’ Shake, it nevertheless said that the Minneapolis-based activists’ nominees would be overmatched in taking over the company. The firm thus suggested investors send a message to the board without actually making any changes.
“In highlighting the repeated failures of governance by the incumbent board, the dissidents have outlined a compelling case … that change is warranted,” ISS wrote in its report, a copy of which was obtained by Nation’s Restaurant News. “But because the dissident slate appears vastly underprepared for the challenges of governing and running this company should they win the total control they seek … we cannot recommend that shareholders support the dissident slate.”
Meanwhile, a second proxy advisory firm, Glass Lewis, recommended that shareholders vote for two of Groveland’s six nominees — suggesting that such a vote would serve as a check on CEO Sardar Biglari’s control of the company without risking its finances.
Biglari has a controversial licensing deal for the use of his name that would pay him 2.5 percent of Steak n’ Shake revenues in the event of a change of control. If shareholders voted for Groveland’s full slate it could constitute a change of control, and Biglari could be entitled to an estimated $20 million a year for at least five years.
“On balance, we believe the dissident’s case — which encompasses operational performance, shareholder return corporate governance and executive compensation practices — provides ample cause to suggest all investors would benefit from improved transparency and, among other things, a reduced degree of largely unmitigated deference to the investment preferences of Mr. Biglari,” Glass Lewis wrote in its report.
Putting two members on the board, he continued, “would trigger substantially altered discourse in the board room” and would be a “strong indication that board stewardship and oversight responsibilities are in no way secondary to Mr. Biglari’s own corporate governance perspectives and acquisitive predispositions.”
Effectively, Groveland and its managing director, Nick Swenson, won the argument it brought to the advisory firms without getting the recommendation they needed to win control of the company. Groveland wants to replace all six members of the Biglari Holdings board and oust CEO Biglari, replacing him with an interim CEO, Gene Baldwin, a former restaurant turnaround consultant with Deloitte.
Making a bad situation worse?
The votes from proxy advisory firms are considered important because many institutional investors follow their voting recommendations closely. It’s difficult for an activist to win seats on a board without those recommendations.
But Biglari Holdings has hit Groveland hard on its lack of stock ownership in the company — it holds less than 0.2 percent of Biglari Holdings shares — and its nominees’ lack of experience at public companies. The company has also criticized Groveland’s plan for Biglari Holdings as lacking in any substance, which seemingly backs up concern about its nominees’ lack of qualifications.
And, indeed, ISS in its report called Groveland’s nominees “underwhelming at best” and noted that its plan for Biglari Holdings “lacks sufficient detail and strategic direction.”
“If there is compelling reason to believe, as shareholders of [Biglari Holdings] may already believe, that change at the board level is warranted,” ISS wrote, “there is also compelling reason to believe that it is possible to make a bad situation worse. Replacing even this challenged a board with a slate of two hedge fund managers, a boutique investment banker, two lawyers and a single, solitary former restaurant executive may demonstrate the point definitively.”
Glass Lewis, meanwhile, recommended two Groveland directors with some restaurant experience, including James Stryker, former CFO of El Torito Restaurants, Inc., who has worked with Rubio’s Restaurants and The Johnny Rockets Group, Inc. It also recommended Steven Lombardo, an attorney who has advised several restaurant companies.
Both firms had harsh words for Biglari Holdings’ corporate governance practices, mainly on two issues: The licensing agreement for the use of Biglari’s name, and the company’s compensation practices.
The licensing agreement would pay Biglari 2.5 percent in a change of control, and involves the addition of the moniker “by Biglari” to the Steak n’ Shake name —even though Steak n’ Shake is an 80-year-old brand. ISS estimates that the licensing agreement could add $100 million to the price of Biglari Holdings if anybody was interested in buying the company.
“’Biglari’ is not as readily associated with food, for instance, as ‘Batali,’ ‘Puck,’ or ‘Flay,’” ISS wrote. “It is difficult to argue that the CEO was not instrumental in leading Steak n’ Shake’s turnaround beginning in 2008. It is still more difficult to argue that his surname had somehow become so much more invested with brand value for burger aficionados… that it was either necessary to rebrand the whole company or worth a $100 million contingent liability to do so.”
The other issue that the firms point to is the 2013 sale of the hedge fund, Biglari Capital Corporation, to Sardar Biglari and the subsequent transfer of Biglari Holdings’ Cracker Barrel stock to that hedge fund. That sale enabled Biglari to skirt a $10 million cap on his investment incentive income based largely on the increasing value of that stock; Biglari Capital was paid a $34.4 million incentive fee last year.
“We question whether the company’s existing incentive strategy is sufficiently designed to uphold shareholder interests,” Glass Lewis wrote. “As it stands, it would appear that the ongoing approach has effectively served to compensate Mr. Biglari at a level wholly incommensurate with overall performance.”
Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze
