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- 1. The Wall Street Transcript Relational and Corporate Governance Investing Richard Tullo Special Situations Analyst Liberum Research rtullo@twst.com
- 2. The Wall Street Transcript What is Relational Investing? Relational Investing: A form of investing where an institutional shareholder commits not to tender their shares to a potential hostile bidder (External Governance) for improved board representation and internal controls (Internal Governance).
- 3. The Wall Street Transcript The Relational Investing Investment Thesis Most Equities Are Held By Passive Index Mutual Funds Actively Managed Mutual Funds Trading Hedge Funds (L/S, Macro, Arbitrage) Pension Plans (Combination of the above) The Side Effects of These Strategies Are High Portfolio Turnover Emphasis Placed On Quantitative Measures Alpha Generated by Low Trading Costs (Large Portfolios) Short Term Time Horizon Dominates Open End Fund Problem Therefore- The Relational Investor Believes Excess Returns May be Generated by Focusing on Long Term Investment Strategies
- 4. The Wall Street Transcript Relational Investors Act more like owners of companies Tend to have a very long term outlook Participate strategic planning Assemble management teams Source of low cost capital
- 5. The Wall Street Transcript Tools of Relational Investing Board Representation Form 13D Proxy Contest Moral Suasion The Courts Capital Relationships
- 6. The Wall Street Transcript Investor Vehicle Investment Warren Buffet Berkshire Hathaway Gilette Edward Lambert EHL Kmart Jeff Ubban Value Act Martha Stewart Christopher Brown Tweedy Brown Hollinger Intl. Bill Miller Legg Mason Growth Fund Tyco Intl. Julian Robertson Tiger Fund US Airways Carl Ichan Ichan Holding Co. TWA WL Ross WL Ross and Co. LTV Corp. Ralph Wittworth Relational Partners Mattel
- 7. The Wall Street Transcript Relational Investing Pros Asymmetrical Rewards Access to management (Reg. FD) Key Industry Insights Create your own catalyst Arrange Mergers Special Benefits
- 8. The Wall Street Transcript Relational Investing Cons High Costs Retaliation Low Liquidity Ultra Long Term Holding Periods Corporate Governance Risk Competition / White Knight
- 9. The Wall Street Transcript 3 questions? What is corporate governance? Why does it matter? How can it make me a better investor?
- 10. The Wall Street Transcript What is corporate governance? Corporate governance is a set of rules under which enterprises organize themselves.
- 11. The Wall Street Transcript Corporate governance covers: Hiring of the CEO Issuing of securities Amending of corporate by-laws Approving of acquisitions Election of directors Voting rules Board responsibilities Executive compensation
- 12. The Wall Street Transcript Corporate Governance’s scope has been expanded to cover: Legal issues Patents Shareholder Lawsuit Compliance issues State, Local and Federal Accounting Controls Corporate Citizenship Strategic planning Initiatives Disposition and Acquisition of assets Alliances
- 13. The Wall Street Transcript Why it matters to the investor
- 14. The Wall Street Transcript Why it matters to society
- 15. The Wall Street Transcript Good Governance Promotes Good Decision Making Promotes Good Returns
- 16. The Wall Street Transcript The three A’s of corporate governance Acceptance Ability Accountability
- 17. The Wall Street Transcript The Good Independent Boards Separate CEO/Chair Experience and Diversity Positive Cash Flow Cumulative Voting Rights Organic Growth Dividends Real Stock Ownership No Related Party Transactions
- 18. The Wall Street Transcript The Bad Low Real Stock Ownership Excessive Stock Sales Classified Boards Poison Pills Growth Through Acquisitions Combined CEO/Chair Entrenched Board (Tenure)
- 19. The Wall Street Transcript The Ugly A/B Structure Conflicted Boards Excessive Stock or Option Grants Expanded Stock or Option Grants Concentrated Stock or Option Grants Excessive Write-Offs Federal Investigations Earnings Restatements
- 20. The Wall Street Transcript How to make equity investments the corporate governance way Never dismiss corporate governance Never focus solely on corporate governance The corporate governance investor calculates the trade off between fundamental and corporate governance risk to calculate an acceptable risk reward profile
- 21. The Wall Street Transcript Begin Corporate Governance Analysis By: Review Corporate Filings (Edgar) 10k Def 14A 8k 10q S-4 R-144 Search News Shareholder Lawsuits Corporate Suits Investigations Scan Chat Rooms Short Stories Stock Promoting Industry Investors
- 22. The Wall Street Transcript Corporate Governance Trouble Signs Disconnects Short vs. Long Management vs. Reality Stock Sales Only make meaningful investments only after you are comfortable with the governance risk
- 23. The Wall Street Transcript Corporate Governance Investing Payoff Studies say good governance pays Likely to receive takeover bids Bankruptcy may be less likely Reputation less likely to be damaged More likely to translate good business into good opportunities for shareholders
- 24. The Wall Street Transcript Why does it work? Lower Cost of Capital Competitive Advantage Less Likely to Empire Build Reduces Expenses and Losses