Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
February 23, 2016
Jeff Gramm has turned in a truly unique and fascinating book on shareholder activism, good corporate governance, value investing, and the history of the modern corporation.
Beside teaching value investing at Columbia Business School, Jeff Gramm actually runs a hedge fund. So he knows the field from both an academic and real-world-application perspective. In his new book, Dear Chairman, he explores the historic perspective—specifically the role of shareholders in corporate oversight and management.
Shareholder activism, he tells us, is now more prevalent than at any time in the history in the public corporation. It may date back to the very first public company, The Dutch East India Company, four hundred years ago, but it is the past one hundred years that "have been the most turbulent period for corporate oversight, marked by power struggles between management teams and shareholders that have culminated in an era of unprecedented shareholder power." He goes on to explain the present situation and how he will uncover its history in the book:
Today no public company is too big to be confronted. Every CEO and corporate director is a potential target unless they have secured voting control of the company.
How did this happen? Why did shareholders triumph in the struggle for corporate control? Who were the key players that ushered in this period of so-called shareholder primacy? If we want to understand the rise of the shareholder, I suggest we go to the source—original letters from the greatest investors ever to intervene in the management of public companies. These letters, and the stories behind them, tell the history of shareholder activism through the last century—from Benjamin Graham's battle with Northern Pipeline in the 1920s to Ross Perot's showdown with General Motors in the 1980s to the well-publicized exploits of today's fresh-faced hedge fund rabble-rousers. We'll meet "Proxyteers," conglomerators, and corporate raiders, and we'll see how large companies dealt with them.
While each of the eight interventions Gramm uses to illustrate that history finds its heart in an original "Dear Chairman" letter, each also dives deep into the company history that prompted it. To tell the story of how Ross Perot led an intervention in General Motors (before being bought out in 1986), one must go back, as Gramm does, to founder William Durant losing control of the company multiple times in the company's early days before finding a backer in Pierre DuPont, then how he lost control of the company for good at the onset of the Great Depression, and then explain the ascent of legendary CEO Alfred Sloan. Reading and reviewing Sloan's classic book, My Years with General Motors, was the first serious foray I took into business books, so I was happy to see it pop up here. Speaking of dichotomy between needing a "sensible centralized functions to provide proper oversight and sure needless inefficiencies" with the benefit of preserving the "spirit and substance of decentralization," Gramm writes:
Sloan understood the delicate balance between decentralization and proper controls, and he knew the principles were inherently contradictory. As he wrote in his classic book, My Years with General Motors, "its very contradication is the crux of the matter."
Sloan's perspective sounds like it could be pulled from some of the best organizational books of today, but My Years with General Motors is not the easiest book to read. It is rather dry, containing actual meeting minutes from GM meetings Sloan was a part of. I'm sure as a value investor interested in that minutiae of operation, Gramm ate it up, and its inclusion demonstrates Gramm's breadth of study and thoroughness of understanding. I mean, I read a lot of business books (it's my job), and I can't remember the last time I came across someone referencing Sloan at all, let alone in a way that spoke so easily and well to the modern business manager and investor. But it is brought in for a very specific reason in the narrative Gramm constructs. Because this is not just a book about shareholder activism. It is more broadly a book about corporate governance. And, as Gramm tells is, "If Sloan's My Years with General Motors is the definitive inside account of GM's rise, the On a Clear Day You Can See General Motors,* by John Z. DeLorean (as told to journalist J. Patrick Wright), is the definitive account of its fall." And it is that fall that led to Ross Perot and his activism.
*I feel like I should mention here that I read a lot of business books, and I've never even heard of On a Clear Day You Can See General Motors by John Z. DeLorean (as told to journalist J. Patrick Wright). So far as I can tell, the book has been out of print for about 36 years, once again demonstrating the thoroughness of Gramm's research.
But why is it important or informative to study activism, in particular, as opposed to the history of management?
By studying shareholder activism throughout history, we'll see the tremendous influence investors now have over public companies, and what issues this raises for the future. We'll also learn about how boards of directors work, what drives management teams to perform, and why corporate oversight can be so terrible. More than anyone cares to think about, today's corporatized world leaves a lot of responsibility with our business leaders, and the shareholders who hire and fire them. The limited liability corporation transformed the world over the past few centuries. What things look like in the future will depend on how we manage our large institutions.
Gramm is often asked by his students what books they should read, and has found very few to recommend that actually inform the work of a value investor. The public record is not much easier to mine. "It is incredible how much useful information from the business world is becoming lost to history." Gramm writes. "I can get a detailed box score from decades-ago college football games, but finding a 1975 annual report from a midsize company is surprisingly difficult." There are plenty of books about when things have gone catastrophically wrong, but while those are entertaining to read, they don't help the work of the everyday value investor much. "Value investors" he tells us "are journalists at heart who feel compelled to gather their own facts and do their own analysis." That is why, in his own class on value investing, "There are no textbooks and no outside reading assignments." All he requires is that his students research a new company each and every week. That is the true work of a value investor. But Gramm has taken it further. Part of his gathering and analysis has been collecting activist shareholder letters from the past. He describes his hedge fund as "archivists" of such letters. And it is these letters that make up the heart of this book.
Public companies are filled with contradiction and conflict of interest. The best place to study these peculiar institutions is at the fault line where shareholders and corporate managers and directors meet. In the pages of this book, we get to walk that line with Ross Perot, Carl Icahn, Warren Buffett, and Benjamin Graham, among others. We won't be able to solve every governance problem at public companies, but we have some of the greatest capitalists who ever lived to guide us.
Because there weren't many, if any, Gramm has written the book he can finally recommend to his students. What Gramm has turned in, in Dear Chairman, is the authoritative history of the activist shareholder, perhaps the only true history of it. And it… is… fascinating. And that makes this not just a book for would-be value investors. It is an extremely well-written, layperson-accessible narrative of the modern history of capitalism and major investors. if you're looking for an instructive book on investing, you'll certainly find it here. But if all you're looking for is an entertaining read and a better understanding the nature of modern capitalism and the political forces at work in (and on) public corporations, Dear Chairman is very much that, as well. It is also a manifesto for good governance wrapped in the stories of shareholder activism.
We have 20 copies available.