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:
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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.