On Biglari Holdings and Type X Behavior

In November of last year, I wrote “The Restaurant Investor” about Steak n Shake, Sardar Biglari, and what it takes for a restaurant to succeed. In the article, I mentioned that Steak n Shake (now Biglari Holdings) was on solid financial footing and that Biglari would likely start pursuing a holding-company strategy by investing excess cash flow into better opportunities. While this did happen, a few other “revelations” came up over the past six months that changed my view on the company. Anyone who follows BH already knows what I’m talking about, but below I’ve included my thoughts on the situation from my most recent letter to investors:

* * *

Most everyone has heard of the “Type A” and “Type B” personality classifications. In Dan Pink’s book Drive, he adapts MIT management professor Douglas McGregor’s ideas to put forth two more classifications: Type X and Type I. Type X behavior is fueled by extrinsic motivation—external rewards like money and recognition. Type I behavior is fueled by intrinsic motivation—the inherent satisfaction of the activity itself. “I don’t mean to say that Type X people always neglect the inherent enjoyment of what they do, or that Type I people resist any outside goodies of any kind,” Pink says. “But for Type X’s, the main motivator is external rewards. Any deeper satisfaction is welcome, but secondary. For Type I’s, the main motivator is the freedom, challenge, and purpose of the undertaking itself. Any other gains are welcome, but mainly as a bonus.”

Pink lists some well-known examples of both types: Warren Buffett, Oprah Winfrey, and Bruce Springsteen are Type I’s. Donald Trump, Jack Welch, and Simon Cowell are Type X’s. So it’s clear that both personalities can be successful. People can also change over time. But Type I’s almost always outperform in the long run. They’re also the people you want working for you.

On April 30, Biglari Holdings announced that its new compensation agreement with CEO Sardar Biglari would provide him with 25% of the gain in Book Value over an annual hurdle rate of 5%. So if the Book Value of the company went up 13%, Biglari would receive 2% of the company’s equity. At its current size, that amounts to around $7 million, including his regular salary.

In and of itself, this compensation agreement isn’t inherently bad. It’s a typical “pay for performance” scheme that many private investment funds use, including our own. (In fact, Biglari’s hurdle is slightly more generous than ours, but thankfully I haven’t had any complaints—yet.) I won’t delve into the more technical reasons I dislike the agreement—other than to say that a public company is not comparable to a private investment fund for a variety of reasons. I think the bigger implications are with the revelation of Type X behavior and how it affects the culture and future strategy of the company.

Type X behavior is fairly common among the CEOs of public companies. So it’s obviously not a disaster. In this particular case however, I think it permanently damages reputation. Aside from Warren Buffett’s history of good deeds, it gives people (shareholders, company managers, etc.) comfort that he isn’t in it for the money and is on equal financial footing with other partners. The strategy of Biglari Holdings is also that of “growth through opportunistic acquisitions.” Acquiring companies when you have a reputation for selfishness and hostility can be a difficult undertaking. Also, regarding the people already working for Biglari Holdings, this behavior may have the effect of changing company culture for the worse.

Braewick Holdings LP still has a long position in Biglari Holdings (BH). We reserve the right buy or sell shares in BH at any time.

9 thoughts on “On Biglari Holdings and Type X Behavior

  1. Someone finally has him pegged. Sadar is about as egotistical as they get. He is not a genius and never will be. He has his little professor by his side and continues to quote Buffet at every turn. At least Mr. Buffet knows how to treat people. Sadar will never be a Warren Buffet and will never be compared to Warren Buffet. As far as I’m concerned, any idiot except the old management at SNS could have turned the company around. Every change he made had been proposed to the management in the past. They just would not listen. Sadar and his holding companies. Didn’t work at Western Sizzle and won’t work at SNS. Would not have worked at Jack in the Box. Would not have worked at the auto parts stores. Won’t work at the insurance company. What’s next???? SONIC!!!!! Why not buy a country club in San Antonio? He’s now making over 1/2 $million at SNS. If I was a shareholder, I would be screaming bloody murder. Someone will turn on this guy. Watch and see.


  2. As a manager at a SNS and an investor, I agree with the author regarding Sadar’s being an egotistical Type X personality. He is hiring more and more upper managers with this same type X personality, and I don’t see great results coming. Is SNS going back to the way it was? I think so!!!


  3. Apparently the company culture has changed, and as recently as this month, vital key executives responsible for the growth strategy have bolted.
    Watch for more turnover which could be the demise of this company


  4. All I know is that once Sardar took over, the entire face of SNS changed. I worked there for 11 years and just had to quit. It is not the same, and it’s all outside people coming in to lead. I was an internal hire who worked my way up, and I hate seeing people come in off the street that know nothing about SNS culture. I know that Sardar has done many good things for the company, but I agree with the author; culture is changing, and it is not good.


  5. Don’t you like Biglari? He has said that he wants to treat his shareholders well. For example:
    “We are here to make money with you, not off you”-Warren Buffett, 1996 letter to shareholders.
    “Not only will I refuse extra remuneration for the time I intend to commit, but I also will not accept any stock options. The reason is simple:We are one of the largest shareholders; thus, we plan to make money with you, not off you.”-Sardar Biglari, 2008 letter to Steak N Shake shareholders.


      1. Max, A major issue that I see here is that when the incentive compensation agreement was approved the stated book value of the company was about $250 million, I think that the economic value exceeded $650 million. The difference was appreciation of assets over decades, a lot of it because of inflation, not real appreciation.
        25% of the $400+ million difference is $100+ million. Easy for
        Biglari to take even though he may have had nothing to do with that appreciation.


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