#125: A New Model For Shareholder Activism
Nov 18th, 2020 by Eric Schleien
- The Proxy Activism Project
- A New Model For Shareholder Activism (Blog)
- A New Model For Shareholder Activism (YouTube)
- A New Model For Shareholder Activism (Eric Schleien / John King)
- Netflix, Sears, and Tribal Leadership (Eric Schleien / John King)
- How To Keep Large Companies Innovative (Eric Schleien / Scott Forgey)
- Eric Schleien discussing Tribal Leadership
- Eric Schleien discussing Activist Investing
- CBRE Case Study - Tribal Leadership
- Comparing Transformational & Transactional Leadership (Eric Schleien)
- Cultural Issues In The Hospital Industry (Eric Schleien)
Took 9 Years To Develop
ProxyActivism is a project that has taken 9 years to create over the course of thousands and thousands of hours to develop, and finally launch. This blog post will go into the background into how ProxyActivism came to be, our process, how I see this project unfolding, and how you as a value investor can be involved (and no, for all you cynical fucks, I’m not trying to sell you something)
The Initial Insight
My idea for ProxyActivism started when I did an ontological leadership program with a former Vice President of Disney who decided to quit his job and devote the rest of his life to empowering people. I got more in a few days of intense Socratic style inquiry than in all the years of reading books combined. As someone who relied on books to “get ahead” this was a completely new paradigm for me. Within the next few months, my income tripled, I repaired relationships with the people around me, and produced many more results. I figured there must be some application to business as well. And it turned out my intuition was right. The company had a consulting arm. The consulting arm of the organization was recently named one of the top consulting companies in the world by Forbes. At a lecture I attended at NYU, the preliminary internal data at the company was that their average client experienced a 600% increase in profits within 12 months. I thought to myself, “I wonder if I could combine ontological coaching with shareholder activism?”
A Zero Competition Game
I figured this must have already been done and figured I would go work for a hedge fund already doing this and get some experience under my belt. However, after searching, I could not find a single hedge fund that was doing activism this way. Even the funds that talked about so-called “transformations” at companies - were really just doing more “change management consulting” and not actually anything transformational. Nothing wrong with that, just not as reliable or as effective.
So I became very frustrated that I could not find a single hedge fund playing this game called transform companies. I knew I was missing something. Every single business study on this kind of work showed results that any shareholder activist would be salivating over, this was clear alpha, and a low competition game with very high barriers to entry. (If the barriers to entry were low, I would not be writing about this or even talking about this).
Why Is Nobody Already Doing This?
I knew I was missing something but couldn’t figure out what. This was the best idea I ever had in my life for a business and also seemingly the lowest hanging fruit. I just couldn’t get why nobody had taken this on before.
And then it became quite clear.
I called 37 different hedge funds or investment managers that were engaged in some kind of activism. I was excited and figured they would all be competing for me to implement this idea at their fund. I had this vision that I would develop this business as a fund, make a ton of money, and make a ton of people (including myself) extremely successful in this world. These “so-called” rational people however became quite cynical. Not skeptical and open. Cynical and closed off. I couldn’t believe it. Some of them told me this was not their wheelhouse and they were going to stick to what they already knew. Ok fine, I can get that. But an unwillingness to learn something new? Whatever happened to expanding the circle of competence in a low-risk manner that would not take up a lot of time? Interesting. However, there were also managers that told me it sounded like bullshit, that the results sounded too good to be true. I asked them if they wanted me to share with them all the independent case studies out there. Not one person was interested.
The Challenge: Combining Two Domains
Now I was intrigued. Ontological coaching is so outside the realm of these managers because you can’t measure it directly as a function of cause and effect. I started to see that all business management tools and techniques were based on cause and effect and that these managers, while extremely smart at reading numbers or learning about different management techniques, were also completely immature around their thinking when it came to leadership, ontology, and anything transformational in nature. They were inappropriately trying to apply their pre-existing models for management techniques onto a leadership conversation as that was their box of awareness/logic system. Anything outside of that - it was like their thinking-brain just shut down and their survival-lizard brain went into automatic. It was outstanding to watch very intellectually smart people start spewing nonsense trying to make sense of something they had no understanding of into other models that were not relevant to this conversation. Long-story-short, they were unable to or unwilling to get it -- regardless of decades worth of data and case studies.
I figured, fuck these guys, I’ll just work with consultants who already have a great track record of transforming businesses and share with them how doing the work they are already doing in the context of a fund structure would be much more lucrative than charging a rate on their time.
The first person I went to was the CEO of this large consulting arm that had a several-decade long track record of doing ontological/transformational work with businesses, many that are in the billions of dollars in market cap. The CEO was extremely friendly on the phone with me but he flat out said that his company was going to stick to what they do best and not get involved in investing or starting a fund which he saw akin to gambling and “playing the market”.
Was this why the idea hadn’t been done before?
I reached out to another woman I knew who for 20 years had been producing amazing results with very large businesses charging $5,000/hour for her services. I spent a month outlining an entire business plan and then did a call with her presenting her with the idea. I again explained how if she did what she did in a fund structure she’d make more than her already lucrative $5,000/hour and would be able to generate even more business as the stock price performance would be worth more in marketing than anything she was currently able to do right now. I wanted her to be the woman that when a guy like Bill Ackman or Carl Icahn needed extra support, they could give her a call.
She told me that she wanted to stick to what she was good at and not get involved in the stock market or hedge funds.
Holy fucking shit!!!!!!
It was becoming very clear to me why this had never been done before. The ontological coaching world didn’t know shit about investing and their brains would shut down. They were more akin to getting involved with startups, sexy industries, and today would be into things like Crypto and 3D printing. Again, all worthy pursuits but not to combine value investing/shareholder activism/ontological coaching together.
Resignation & Cynicism
On the flip side, many great investors are great because they are resigned and cynical by nature. Where is management lying to me? How are the books being cooked? Even people reading this article, many great investors may be reading this with their automatic little inner voice saying something like (where is this guy going to try to sell me something or bullshit something). The cynicism is great or investing and looking at raw data, however, it’s horrible for relationships, partnering with others, leadership conversations, creativity, and innovating. They see no or little possibility. Great for investing in a timber company at a huge discount to their land, not so great for transforming a company that doesn’t involve some cookie-cutter management tool that you can neatly fit inside a spreadsheet.
I felt completely defeated. I needed a lot of capital to get this off the ground yet no fund with the capital to do this would even listen to me or attempt to get it. I also needed an ontological coaching skillset to do this. Nobody with a track record in this realm understood value investing and wanted nothing to do with it despite the fact that they were more effective activists than any of the famous hedge fund activists (yet they didn’t even realize how valuable their skillset was). It’s like a biochemist who ends up realizing they can make a ton more money also consulting for a biotech hedge fund yet they want nothing to do with the stock market. Similar idea. It was also daunting because to get a background in ontological coaching would take many years of intense training, it wasn’t some horseshit thing I could do online and get a bullshit life-coaching certificate in a month. Fuck fuck fuck.
Finding A Needle In A Haystack
In one last desperate attempt, I posted a message on Facebook that said something like: “I’m working on a huge project where there is a lot of money involved for the success of this. I need someone who has a background in ontological/transformational coaching, has worked with many businesses over 10+ years, and has a successful track record at doing it”
I figured with everyone I was connected to on Facebook who was part of this industry, someone would know somebody who I could connect with. All I needed was one person to get it. I figured it I found one successful consulting firm or coach to get this, then I could either get their former clients to invest in a fund we start or introduce their former clients to some of these cynical hedge fund managers to get them to see this wasn’t some bullshit motivational garbage horseshit thing I was trying to sell them on (also funny because I wouldn’t even make money unless there was actually success the way this project is structured...but again….their preconceived belief systems overrode any kind of logical and rational thinking).
Meeting John King: Tribal Leadership
Within 24 hours, the messages started coming in. Eventually that led me to a guy who then introduced me to John King the creator of Tribal Leadership who co-wrote a book about his technology with a professor at USC, Dave Logan who started CultureSync. I loved John. He reminded me of Charlie Munger with his intellectual thirst, his independent way of thinking, and his non-stop learning, reading, studying. Like Munger, the guy was a genius (even though he will refuse to let me call him that), and he is a polymath who has the capacity to take principles from one field and synthesize them with another field to come up with completely new insights for looking at the world. When I shared with John how much he reminded me of Munger, he told me he was a huge fan of Charlie and also a lover of mental models. This was my kind of guy. Over the next 5 years he spent countless hours training me to be able to deliver his Tribal Leadership work. Finally I had found a form of ontological coaching I could build the skillset to deliver, I could find people around me who could also deliver this work and now all I needed was a fund manager to supply some capital.
I asked John if he would let me speak to some of his former clients to start getting testimonials together that I could share/use as a resource for fund managers I speak to. He said he would be happy to do that as long as he got consent from the clients first. All of his former clients he asked were happy to give him consent. I ended up speaking to people such as the Founder/CEO of 1st Service Solutions, Ann Hambly to the creator of the Private Client Group at CB Richard Ellis and former head of Colliers International for all of North America, Glen Esnard. I also ended up meeting through John, the guy who created the culture and foundational work at Lululemon when it was just 4 people and who now coaches VP’s at Google, LinkedIn, and PayPal.
Each person I spoke to was fascinating and knew I wanted to work with them on this project if I could in some capacity. They all got what I was attempting to do.
Meeting Chuck Gillman
My big break came around 2017/2018 when I was in Omaha, Nebraska at the Berkshire Hathaway meeting and was attending the annual party I go to every year hosted by Whitney Tilson and Chuck Gillman. I had been going every year since I was 18 and had gotten to know both of them. Chuck has an outstanding track record as a shareholder activist. He runs a family office and only invests in microcap situations where he can do activism. He focuses solely on that. I had shared with Chuck that I had a team of people that I partnered with who had a background in turning around companies focusing on organizational culture and that a year 10 longitudinal study showed an average increase of 3-5x in profits within 24 months of organizations doing the work. Chuck was intrigued and had the humility to get that he had no idea how the technology worked and was completely outside of his circle of competence yet was totally willing to listen for as many hours as it took to understand the process, how it worked, and get a good handle on what we wanted to do. He immediately saw the opportunity where others didn’t. I introduced him to John King on the phone and he was immediate impressed by some of the formers examples of organizations that had used this work such as the private client group of CB Richard Ellis which seemed to defy industry tailwinds during an extremely difficult time for the industry and also Zappos which Tony Hsieh shared about his influence of Tribal Leadership on the company in his book Delivering Happiness and now gives out copies to all his employees.
Today I have a pretty deep bench of trained Tribal Leaders with long track record of executive experience and turning around companies that are ready to get on boards when duty calls.
Going Forward: Our Process
This is what our process looks like going forward.
Identity Microcap Targets
The first step is simply identifying companies that we could bring Tribal Leadership into the organization. This is extremely difficult and the hardest part. The criteria are very strict. The market cap of the company must be under $400 million and ideally below $200 million. On top of that, management must own 10% of the stock or less. Then the management must be underperforming for a long period of time due to incompetence and mismanagement or simply because they’re corrupt.
Talk To Existing Shareholders
However, we do things a bit unconventionally. Instead of taking a position and then attempting to wage a proxy battle, we first start talking to existing shareholders that already own a lot of stock. If we win the election, we then buy a lot of stock in the open market. Yes, it caps our upside but it also limits our downside if the election doesn’t turn out. This is what Chuck has been doing for several decades and it’s a very low-risk and patient approach to being successful and getting people onto a board where there’s activism opportunity. Chuck spends most of his time networking with people who invest in small and microcap stocks with the idea that at some point a small percentage of these people will reach out to him with a company that has been underperforming and management won’t work with them or take any of their ideas and this is a last resort. Now, partnering with Chuck, I have been taking calls on a weekly basis with shareholders from all over the world and it’s been a fascinating and fun experience to meet so many intelligent and interesting people both here in the United States and abroad.
The next step is I examine the business model to see if I deem it a candidate for Tribal Leadership. There are some businesses where there really isn’t a shot at being able to do anything. However, often what looks like a strategic issue or mismanagement issue is merely a cultural issue. When you move organizations from Stage 2/Stage 3 to Stage 4 - the managerial strategies and behaviors naturally alter naturally as a function of the new culture and profits increase by a factor of 300% - 500% within 2 years. Results start showing up in as little as 6 months.
If the company seems like a fit, the next step is to call major shareholders and see if they are interested in seeing change and interested in new board members who will be aligned with shareholders. If any of our team gets on the board, the salaries will be extremely low and we will be incentivized with out of the money options. Chuck has a long track record of being friendly towards shareholders once he and/or his team gets on the board. This will be no different….(remember I’m not re-inventing the wheel here...just combining two wheels to create an ultra-wheel).
Paying Legal Expenses & Getting On The Board
Then the next step is we will pay all the legal expenses of the Proxy Battle and we will do it knowing we already have the support of large shareholders. If we know they will vote for our slate, we will spend the money to make it happen.
Once the new board members get elected who already are trained in or have experienced Tribal Leadership for themselves, the next step is actually transforming the culture of the organization.
One of the wonderful things is that this does not require reorganization of any kind. The current structure and configuration of a company work well with Tribal Leadership because the kinds of benefits are in management and leadership capacity and the ability to work together to resolve problems and produce business results. Of course measuring results is important. The great thing about this project is that the fact we will only be working with public companies will make our successes public. The first 1-2 situations will be the hardest. However, as this is proven in public markets (vs ontological coaching being proven outside of a fund structure for 40 years...I know, I know...it shouldn’t matter but it does to most people)....my goal is to get to the point where people start calling us to help them and this process becomes even easier. There is some horseshit conversation that these are “soft skills” which is far from the truth. The soft stuff is the hard stuff. Measuring is easy. You measure before you start a project. Measure after you finish a project. When you go from Stage 3 to Stage 4, the results generally go from 3-5x in measurable results, including the bottom line. There are a variety of different metrics that we utilize as we go through the process. Different metrics are appropriate for different circumstances and cultural stages. For a run down on the different stages of culture, refer to the Tribal Leadership TED talk, here.
Velocity In Results
It also doesn’t take long to implement a new culture. The actual initial training only takes about 2 days. It’s intense with very long days. Many people report it as the most valuable and life altering experience they’ve ever had. That’s not hyperbole either. After the 2 day program, there’s usually half day follow ups every 6 weeks at the beginning until it becomes self sustainable and really gets embedded into every facet of the organization. Generally, it takes 18-24 months to elevate from a Stage 2 or 3 culture to a Stage 4 culture. Results start to show up within 1-2 quarters.
The Myth Of Employee Buy-In
One of the concerns is how to get “employee buy-in” which is some garbage taken from your traditional consultant/flavor of the month who has some strategy or point of view they try to force onto every employee. Employees roll their eyes while pretending to go along because they need to play nice with the boss. It’s the reason why most consultants are a total waste of money. Motivational speakers are even worse. With Tribal Leadership there is no buy-in. Instead we distinguish what is already there in a way people have never seen before. To my knowledge it is impossible to change people. The first step in implementation (buy-in...except not really...will just look like that on the surface) is that we first do a diagnostic that tells us where we are culturally and the prevailing issues or predicaments that are just not getting resolved. This is called “culture mapping.” Then, we look to discover where there already is alignment to create new overall strategies, using the “strategy model.” Then, we drill down and do the work until each and every person has their own map and their own self-designed strategy. Success depends upon the degree to which people follow the strategies that they created themselves. Normally, the people in the C-Suite hand a strategy to the employees and demand “buy-in.”
The way we do it, we involve everybody in the design of their own strategies and the wisdom of the overall strategy all at once.
No Use Of Force
Something we get asked a lot is if we aren’t forcing this upon anyone, why would someone who is already very successful want to partake in something like this. It’s a valid question and a key issue. Those at Stage 3 ‘have it made’ and are in control of those at Stage 2, so their incentive is predictably not great to change their ‘I’m great- You're not’ point of view. However, if the overarching interest of the organization is to elevate their culture and the outcomes and results of the greater group, then the Stage 2/Stage 3 culture must move to Stage 4. In order to do this, the issue of ego and self-promotion on the part of the Stage 3 people must be addressed. The organization will only move to Stage 4 if the issue of the Stage 2/Stage 3 mentality has been successfully addressed. The issue with Stage 3 will always show up in the overall financial success of the company.
The Low Hanging Fruit Alpha
Another thing I get asked by nearly every hedge fund manager is if there’s such a focus on shareholder value, why isn’t everyone doing this? Of course the asshole response would be “because people like you are closed off to this because you’re lazy and/or immature in your thinking.” However, you can’t really say that to anyone. I had this conversation recently with the COO of a business unit of a major multi-billion dollar publicly traded company that’s compounded by nearly 20% over the last 20 years. They implement a similar kind of work at their business and as he said, “it’s the last bastion of alpha because it’s low hanging fruit that nobody is doing so there is no competition.”
The ‘shareholder value’ focus is a focus on the bottom line, not a focus on the cultural vitality of the organization. Tribal Leadership is focused on the well-being and effectiveness of the organization. Ultimately, shareholder value is an outcome of an effective and stable culture. The more effective the culture of the people at work, the more effective their results. Our philosophy and our supporting data have shown that if we effectively attend to the well being of the people doing the work, the quality of their work will show up in measurably higher productivity.
What’s Missing In The Prevailing Model For Shareholder Activism: Icahn, Ackman, Etc
What we do is drastically different and also significantly more effective than what is taught in modern day business schools. Firms like McKinsey and basically every shareholder activist that is using management models, cost cutting, etc is the modern portfolio theory of the leadership world. That doesn’t mean it doesn’t produce results. You can still make money using modern portfolio theory over 50 years. You can still improve shareholder value by cutting costs and improving efficiencies. It’s just leaving a ton of extra value on the table that isn’t even that difficult to attain. It’s low hanging fruit. Business schools are strong on management and weak on training people to be leaders. Management is based on control, domination, survival, and ultimately, fear. Most management is a carrot/stick game. The game is about managing for a result against a diminishing resource - time. Leadership requires transforming the relationships that people have while working together, mutual respect, collaboration, and stability. The culture of an organization is a function of the quality of leadership provided and attended to. If the management disrespects the employee, the employee will slow down and waste the most critical resource that management has - time. If the management provides effective leadership, the employee will respond by using the time effectively. Employees who have the experience of partnership and respect of their employers produce net superior results.
Tribal Leadership builds sustainable environments where leadership and partnership arise naturally. Our data supports the point of view that a focus on culture and leadership produces superior results in a more efficient and sustainable manner than management techniques that focus on operational efficiencies alone.
Nothing Wrong With Management Conversations
I’m also not saying there’s anything wrong with making operations or management more efficient. I’m saying that there’s an entire component that’s missing that’s leaving a lot of low-hanging fruit alpha on the table. Put simply, Management and Leadership are in and of two different domains. Management is about efficiency and is the vital and necessary underlying craft of any great company or organization. Leadership is about empowerment, teams, and the relationship between people working on a team, between teams to teams, and ultimately, an organization operating as a single unit producing profits and creating shareholder value. Leadership is in its own realm and requires a different mindset and worldview. The leader must be a great manager - that is a given - but he/she also must know when to step away from the psychological limitations of the manager fixated on efficiency and adopt the mindset of a leader who is exploring the creative world of breakthrough into ‘out of the box’ thinking and hitherto unknown or experienced effectiveness of the organization.
Culture Kills Off Strategies
Drucker famously said, “Culture eats strategy for breakfast.”
Business school strategies are mostly derived from HBS and Michael Porter - a brilliant man. However, according to Peter Drucker, at best, the Porter model is successful 30% of the time on average. That is because the strategy is ‘imposed’ on the employee and the employee has little or no input. Therefore, the person who best knows the job and is actually doing it is told what to do and how to do it. Predictably, the employee often resists and is resentful. The strategy model we teach in Tribal Leadership is between 70-80% successful. This is largely because we teach the employee to design their own strategy, quarter by quarter. They are ‘bought in’ by definition from the beginning of the process and appreciate that their input is honored. Furthermore, the strategy model we teach is simpler, self-managing, and self-correcting. In essence, a more elegant design. Furthermore, it allows leaders and managers to take advantage of and capitalize on the inherent understanding of customer data and other critical aspects of having an organization perform at a high level and make its clients and market happy.
ABOUT ERIC SCHLEIEN
Over the past decade, Eric has trained thousands of individuals including board members of public companies as well as several Fortune 500 CEOs. Eric specializes in organizational culture and has become a leading authority on organizational culture in the investment industry.
Eric has been investing for 15 years and has been using breakthrough coaching methodologies for over a decade. Eric had the insight to combine proven coaching methodologies with shareholder activism techniques to create an entirely new model for shareholder activism that was more reliable and created greater sustainable results in a rapid period of time. On average, Tribal Leadership produces a 3-5x increase in profits of culturally troubled companies within an average of 24 months or less.
Eric currently resides in Philadelphia, PA.
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CONTACT ERIC SCHLEIEN