BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Berkshire Hathaway Wannabe Turning Into A Quagmire For Investors

This article is more than 9 years old.

Investors in Biglari Holdings , a restaurant conglomerate crafted to resemble  Berkshire Hathaway but with none of the shareholder friendly governance practices championed by Warren Buffett, are poised to face a quagmire at the company's annual meeting. There's little reason left to support self-dealing CEO Sardar Biglari or the company's inattentive board of directors, but an activist slate run by fledgling hedge fund Groveland Capital poses a murky path forward.

[For More Coverage: The Implosion Of A Warren Buffett Wannabe]

Biglari Holdings is desperately in need of strong management team and a new board, it just doesn't appear that Groveland Capital, a hedge fund with roughly $30 million in assets and an unknown track record, can solve all of the company's operational and governance woes. On Thursday evening, proxy advisory firm ISS urged Biglari Holdings investors to withhold votes on six incumbent board nominees, including Mr. Biglari, based on "persistent and pervasive problematic governance practices," but the firm also recommended a no vote for Groveland's proxy card given what it says was "extensive unpreparedness on the part of the dissident."

ISS appears to have been most put off by the fact that Groveland identified an interim CEO to replace Biglari, but hadn't met with them by the time board nominations were due. Ultimately, the proxy firm saw shareholders' choice as backing Biglari, who's shown some ability to manage a restaurant business but extremely poor judgement as a public company CEO, or casting their support of a small hedge fund with little industry experience. "Neither choice is appealing," ISS said. Its recommendation, however, would lead to a re-election of Biglari.

Glass Lewis, another proxy advisory firm, gave a different recommendation, but the result would also keep Biglari in power. It said shareholders should vote on Groveland's proxy card, but only back two directors, Stephen J. Lombardo a partner at law firm Katten Muchin, and James W. Stryker a retired restaurant executive, but that shareholders withhold votes for the remainder of Groveland's card.

About its recommendation, Glass Lewis said, "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. This is particularly true, given Mr. Biglari's more recent trend of allocating investor funds in a manner that appears to accomplish little beyond further facilitating his largely unchecked allocation authority and expanding his economically misaligned BHI voting influence."

Without a decisive recommendation from proxy firms, Biglari's annual meeting might turn into a punt, but there also now appears to be a path by which Groveland wins a few director nominations. “We went from -- 'who are these guys?' -- to Glass Lewis saying vote for these guys and ISS saying don’t vote for the incumbents," Groveland's Nick Swenson told Forbes by telephone.  "We think this is a win.”

Non-confidence in Biglari, a manager who now pitches his company as "a vehicle for shareholders to invest in Sardar Biglari – a proven entrepreneur, operator and investor,” is likely to rise significantly and underscore that his days as chairman and CEO of a NYSE-listed firm are likely numbered.

Even if it loses its proxy campaign, Groveland did succeed in shining a spotlight on Biglari's systematic abuses of shareholders, which reached a boiling point this year when Biglari took home $34 million in inventive-based pay despite a significant deterioration in his company's operational performance. Both ISS and Glass Lewis agreed with Groveland's sweeping criticism of Biglari's self dealing and its analysis of his poor managerial performance -- and in many respects it's surprising the benefit of the doubt broke Biglari's way instead of Groveland's.

Perhaps, investors will take a more tough-minded stance.

There are two obvious takeaways: Left in its current structure, Biglari Holdings is no Berkshire Hathaway. In fact, it is likely to continue to be a poor, even infuriating investment. The company's lagged benchmarks on a one, three and five-year basis, and operational performance is likely to get worse, not better under Biglari. But, it is also clear that it won't take much to unseat Biglari or his board. Were a credible investor to lead a change campaign they'd likely easily succeed and quickly undo all of the shareholder unfriendly landmines that Mr. Biglari's tripped across his company.

There's one other alternative: Perhaps, after years of hoodwinking shareholders, Biglari will see that he's lost the confidence from the market and needs to reform. A look into the abyss of his career as a public company CEO may cause him to stop pillaging corporate assets, taking outrageous compensation and operating his businesses with impunity.

That, however, appears unlikely.