Invest Like the Best with Patrick O'Shaughnessy
00:23:51 · Dan Loeb
[00:23:51] S2: I think we have an incredible system. Let's start with that. There's something beautiful about the American capitalist system in the aspect of it, that creates boards of directors that ultimately have a role within both capitalism and a democratic system where the board is responsible and answerable to the shareholders and is responsible for accountability for the management, setting strategy and key financial decisions. We have a great system in place. Where the shortcomings within governance happen is when the board members lose sight of what their duties are as fiduciaries, or the composition of the board is such that they aren't really equipped to carry out that duty because there is a lack of deep knowledge or intellectual or talent diversity on the board, or they are thinking excessively about things other than their duty to shareholders. Not to say that the board doesn't have other responsibilities, but but I think ultimately they should feed into creating shareholder value. If you go back to both Milton Friedman and things that Warren Buffett have said, of course boards care about the communities that they serve, the products, the employees, proper conduct, etc. All those things are very important. They are not inconsistent with creating shareholder value. In fact, it's part of creating shareholder value. But I think, especially a few years ago, the business roundtable said we're no longer going to say that board's responsibility is primarily to drive shareholder value. Well, I think it was a distraction from what their real duty is. Bad governance I've seen is when they let their loyalty or relationship to a CEO who's not up to the job overshadow their duty to shareholders. That's probably the main thing. It's very important to understand the boards don't run the companies. In a well functioning company, the board is strategic, not tactical. So they should be really focusing on those things. But if the company isn't allocating capital well, or isn't holding the management team responsible, Or there's some very obvious things that should be done differently? That's when we can come in.
00:26:16 · Patrick O'Shaughnessy, Dan Loeb
[00:26:16] S0: What have you learned about the power of writing in investing? You're obviously extremely well known for some letters you've written to chairs of the board and things like this for your entire career. And I just know you're a writer, you've used writing in a lot of different ways. What is great writing to you? And how do you use it? Well, [00:26:32] S2: great writing is really about clear thinking and organizing your thoughts, communicating them to people in a clear way to get a desired outcome. You can also use writing to influence. And in our case, it's been very helpful in getting the attention of other shareholders, sometimes the board itself, shaking them up a little bit, getting media attention focused on a board. I think about activism, you've got a few different levers. You can have a financial lever so we can make a bid for the company. You have legal levers, proxy contests, litigation, information requests, etc. Social pressure is actually a very effective way. And I think the best way to put social pressure on a company is through writing and PR efforts around the company.
00:26:32 · Dan Loeb, Patrick O'Shaughnessy
[00:26:32] S2: great writing is really about clear thinking and organizing your thoughts, communicating them to people in a clear way to get a desired outcome. You can also use writing to influence. And in our case, it's been very helpful in getting the attention of other shareholders, sometimes the board itself, shaking them up a little bit, getting media attention focused on a board. I think about activism, you've got a few different levers. You can have a financial lever so we can make a bid for the company. You have legal levers, proxy contests, litigation, information requests, etc. Social pressure is actually a very effective way. And I think the best way to put social pressure on a company is through writing and PR efforts around the company. [00:27:27] S0: If I look across all the different activism that you've done, it seems like maybe there's an interesting theme of you going activists on places or people or companies that hold themselves out as quite high status, but then they're not living up to it. Whether that's Sotheby's or some of the Japanese conglomerates or just certain CEOs and their family members on the board, things like this. There's like a status component that would be deserved if being earned on an ongoing basis, but maybe the company wasn't and you saw that gap as an opportunity. Is that a thing? Do I see a correct pattern? [00:27:57] S2: Certainly was the case in Sotheby's. [00:28:00] S0: Can you tell that story? That's such a good story. Such an interesting one.
00:28:02 · Dan Loeb
[00:28:02] S2: I'll come back to the story about Sotheby's in a second. Board members often feel a sense of status for being on these boards. And I think that in itself needs to be dispelled because I think if you're on a board because you are either getting status or you're getting income and that's your primary reason for doing it, not for representing shareholders, then that's where we come in to try to disintermediate that and take away some of the status or increase the cost of doing that. Sotheby's I thought was just an interesting company. It was a pretty small company and a small target for us. It's actually a very good example of what you're talking about because although it was a public company, it wasn't really run for the shareholders. It was run because I think people did feel like it was a high status business, had been mismanaged, it didn't really recover from an antitrust violation that spilled into criminal charges brought against the company and some of the individuals. The business itself was a good business, but just run unbelievably, unprofitably. The company had been around since the seventeen hundreds and some of the business practices had not really been updated since that time. We took a position, we bought 9.9% of the company. We went after the board, but really just wanted them to implement some basic business practices that we thought would be better. The CEO that was there, he didn't have a particularly deep knowledge of art. I think he came out of the rug division, didn't really have deep relationships with the collectors either. So we came in and gave him a shot for a year and then I think the board came to realize he wasn't the right guy. We brought in a guy named Tad Smith who was terrific from MSG, cleaned up the operations, improved the technology, they sold the company. Good result. Yeah, was a good result. Do you
00:30:03 · Patrick O'Shaughnessy, Dan Loeb
[00:30:03] S0: think that there's a lot of that lurking out there today? If one wanted to start a career and only do that, go find companies where it was kind of mediocre or bad management, where if it was good management, the company would do way, way, way better. Do you think there's still a lot of that out there? [00:30:19] S2: I think there's probably some of that in the sub $2,000,000,000 market cap space and not necessarily even bad management, but b plus management, not optimizing. What we're finding is that it's almost like a negative selection process. We'd much rather invest in a great company with awesome management that's doing the right things and cheer them on then kind of find something that but for mismanagement, the company would be worth a lot more. So what you find is that if the things that you've identified are badly run, then there's probably 10 times more things that are badly run.
00:30:19 · Dan Loeb, Patrick O'Shaughnessy
[00:30:19] S2: I think there's probably some of that in the sub $2,000,000,000 market cap space and not necessarily even bad management, but b plus management, not optimizing. What we're finding is that it's almost like a negative selection process. We'd much rather invest in a great company with awesome management that's doing the right things and cheer them on then kind of find something that but for mismanagement, the company would be worth a lot more. So what you find is that if the things that you've identified are badly run, then there's probably 10 times more things that are badly run. [00:31:02] S0: One of the interesting things about their point is that if I understand it correctly, it's something like 60% credit, which I think would surprise a lot of people. And also when you started, I think you started with no institutional investors. It was individuals, families, things like this. And it seems like you sort of have felt your way into the strategy. The strategy as it exists today probably wouldn't go on like a clean PowerPoint deck. If you were a new firm doing this from scratch, it would be hard to pitch what you have now. And I'm really interested by that by a firm which has evolved into its model, and it's 60% credit today, and it's a blend of other things. And I'd love to just talk about that evolution and why it is and the value of that evolution versus predicting, okay, here's exactly what we're going to do.