#125: A New Model For Shareholder Activism

Show Links

The Proxy Activism Project

A New Model For Shareholder Activism (Blog)

A New Model For Shareholder Activism (YouTube)

A New Model For Shareholder Activism (Eric Schleien / John
King)

Netflix, Sears, and Tribal Leadership (Eric Schleien / John
King)

How To Keep Large Companies Innovative (Eric Schleien / Scott
Forgey)

Eric Schleien discussing Tribal Leadership

Eric Schleien discussing Activist Investing

CBRE Case Study - Tribal Leadership

Comparing Transformational & Transactional Leadership
(Eric Schleien)

Cultural Issues In The Hospital Industry (Eric Schleien)

Took 9 Years To Develop

ProxyActivism is a project that has taken 9 years to create over
the course of thousands and thousands of hours to develop, and
finally launch. This blog post will go into the background into
how ProxyActivism came to be, our process, how I see this project
unfolding, and how you as a value investor can be involved (and
no, for all you cynical fucks, I’m not trying to sell you
something)
The Initial Insight

My idea for ProxyActivism started when I did an ontological
leadership program with a former Vice President of Disney who
decided to quit his job and devote the rest of his life to
empowering people. I got more in a few days of intense Socratic
style inquiry than in all the years of reading books combined. As
someone who relied on books to “get ahead” this was a completely
new paradigm for me. Within the next few months, my income
tripled, I repaired relationships with the people around me, and
produced many more results. I figured there must be some
application to business as well. And it turned out my intuition
was right. The company had a consulting arm. The consulting arm
of the organization was recently named one of the top consulting
companies in the world by Forbes. At a lecture I attended at NYU,
the preliminary internal data at the company was that their
average client experienced a 600% increase in profits within 12
months. I thought to myself, “I wonder if I could combine
ontological coaching with shareholder activism?”


 
A Zero Competition Game

I figured this must have already been done and figured I would go
work for a hedge fund already doing this and get some experience
under my belt. However, after searching, I could not find a
single hedge fund that was doing activism this way. Even the
funds that talked about so-called “transformations” at companies
- were really just doing more “change management consulting” and
not actually anything transformational. Nothing wrong with that,
just not as reliable or as effective. 


So I became very frustrated that I could not find a single hedge
fund playing this game called transform companies. I knew I was
missing something. Every single business study on this kind of
work showed results that any shareholder activist would be
salivating over, this was clear alpha, and a low competition game
with very high barriers to entry. (If the barriers to entry were
low, I would not be writing about this or even talking about
this).


 
Why Is Nobody Already Doing This?

I knew I was missing something but couldn’t figure out what. This
was the best idea I ever had in my life for a business and also
seemingly the lowest hanging fruit. I just couldn’t get why
nobody had taken this on before.


And then it became quite clear.


I called 37 different hedge funds or investment managers that
were engaged in some kind of activism. I was excited and figured
they would all be competing for me to implement this idea at
their fund. I had this vision that I would develop this business
as a fund, make a ton of money, and make a ton of people
(including myself) extremely successful in this world. These
“so-called” rational people however became quite cynical. Not
skeptical and open. Cynical and closed off. I couldn’t believe
it. Some of them told me this was not their wheelhouse and they
were going to stick to what they already knew. Ok fine, I can get
that. But an unwillingness to learn something new? Whatever
happened to expanding the circle of competence in a low-risk
manner that would not take up a lot of time? Interesting.
However, there were also managers that told me it sounded like
bullshit, that the results sounded too good to be true. I asked
them if they wanted me to share with them all the independent
case studies out there. Not one person was interested.
The Challenge: Combining Two Domains

Now I was intrigued. Ontological coaching is so outside the realm
of these managers because you can’t measure it directly as a
function of cause and effect. I started to see that all business
management tools and techniques were based on cause and effect
and that these managers, while extremely smart at reading numbers
or learning about different management techniques, were also
completely immature around their thinking when it came to
leadership, ontology, and anything transformational in nature.
They were inappropriately trying to apply their pre-existing
models for management techniques onto a leadership conversation
as that was their box of awareness/logic system. Anything outside
of that - it was like their thinking-brain just shut down and
their survival-lizard brain went into automatic. It was
outstanding to watch very intellectually smart people start
spewing nonsense trying to make sense of something they had no
understanding of into other models that were not relevant to this
conversation. Long-story-short, they were unable to or unwilling
to get it -- regardless of decades worth of data and case
studies. 


I figured, fuck these guys, I’ll just work with consultants who
already have a great track record of transforming businesses and
share with them how doing the work they are already doing in the
context of a fund structure would be much more lucrative than
charging a rate on their time. 


The first person I went to was the CEO of this large consulting
arm that had a several-decade long track record of doing
ontological/transformational work with businesses, many that are
in the billions of dollars in market cap. The CEO was extremely
friendly on the phone with me but he flat out said that his
company was going to stick to what they do best and not get
involved in investing or starting a fund which he saw akin to
gambling and “playing the market”. 


Fuck…... 


Was this why the idea hadn’t been done before?


I reached out to another woman I knew who for 20 years had been
producing amazing results with very large businesses charging
$5,000/hour for her services. I spent a month outlining an entire
business plan and then did a call with her presenting her with
the idea. I again explained how if she did what she did in a fund
structure she’d make more than her already lucrative $5,000/hour
and would be able to generate even more business as the stock
price performance would be worth more in marketing than anything
she was currently able to do right now. I wanted her to be the
woman that when a guy like Bill Ackman or Carl Icahn needed extra
support, they could give her a call. 


She told me that she wanted to stick to what she was good at and
not get involved in the stock market or hedge funds.


Holy fucking shit!!!!!!


It was becoming very clear to me why this had never been done
before. The ontological coaching world didn’t know shit about
investing and their brains would shut down. They were more akin
to getting involved with startups, sexy industries, and today
would be into things like Crypto and 3D printing. Again, all
worthy pursuits but not to combine value investing/shareholder
activism/ontological coaching together. 
Resignation & Cynicism

On the flip side, many great investors are great because they are
resigned and cynical by nature. Where is management lying to me?
How are the books being cooked? Even people reading this article,
many great investors may be reading this with their automatic
little inner voice saying something like (where is this guy going
to try to sell me something or bullshit something). The cynicism
is great or investing and looking at raw data, however, it’s
horrible for relationships, partnering with others, leadership
conversations, creativity, and innovating. They see no or little
possibility. Great for investing in a timber company at a huge
discount to their land, not so great for transforming a company
that doesn’t involve some cookie-cutter management tool that you
can neatly fit inside a spreadsheet.


I felt completely defeated. I needed a lot of capital to get this
off the ground yet no fund with the capital to do this would even
listen to me or attempt to get it. I also needed an ontological
coaching skillset to do this. Nobody with a track record in this
realm understood value investing and wanted nothing to do with it
despite the fact that they were more effective activists than any
of the famous hedge fund activists (yet they didn’t even realize
how valuable their skillset was). It’s like a biochemist who ends
up realizing they can make a ton more money also consulting for a
biotech hedge fund yet they want nothing to do with the stock
market. Similar idea. It was also daunting because to get a
background in ontological coaching would take many years of
intense training, it wasn’t some horseshit thing I could do
online and get a bullshit life-coaching certificate in a month.
Fuck fuck fuck.
Finding A Needle In A Haystack

In one last desperate attempt, I posted a message on Facebook
that said something like: “I’m working on a huge project where
there is a lot of money involved for the success of this. I need
someone who has a background in ontological/transformational
coaching, has worked with many businesses over 10+ years, and has
a successful track record at doing it”


I figured with everyone I was connected to on Facebook who was
part of this industry, someone would know somebody who I could
connect with. All I needed was one person to get it. I figured it
I found one successful consulting firm or coach to get this, then
I could either get their former clients to invest in a fund we
start or introduce their former clients to some of these cynical
hedge fund managers to get them to see this wasn’t some bullshit
motivational garbage horseshit thing I was trying to sell them on
(also funny because I wouldn’t even make money unless there was
actually success the way this project is structured...but
again….their preconceived belief systems overrode any kind of
logical and rational thinking).


 
Meeting John King: Tribal Leadership

Within 24 hours, the messages started coming in. Eventually that
led me to a guy who then introduced me to John King the creator
of Tribal Leadership who co-wrote a book about his technology
with a professor at USC, Dave Logan who started CultureSync. I
loved John. He reminded me of Charlie Munger with his
intellectual thirst, his independent way of thinking, and his
non-stop learning, reading, studying. Like Munger, the guy was a
genius (even though he will refuse to let me call him that), and
he is a polymath who has the capacity to take principles from one
field and synthesize them with another field to come up with
completely new insights for looking at the world. When I shared
with John how much he reminded me of Munger, he told me he was a
huge fan of Charlie and also a lover of mental models. This was
my kind of guy. Over the next 5 years he spent countless hours
training me to be able to deliver his Tribal Leadership work.
Finally I had found a form of ontological coaching I could build
the skillset to deliver, I could find people around me who could
also deliver this work and now all I needed was a fund manager to
supply some capital.


I asked John if he would let me speak to some of his former
clients to start getting testimonials together that I could
share/use as a resource for fund managers I speak to. He said he
would be happy to do that as long as he got consent from the
clients first. All of his former clients he asked were happy to
give him consent. I ended up speaking to people such as the
Founder/CEO of 1st Service Solutions, Ann Hambly to the creator
of the Private Client Group at CB Richard Ellis and former head
of Colliers International for all of North America, Glen Esnard.
I also ended up meeting through John, the guy who created the
culture and foundational work at Lululemon when it was just 4
people and who now coaches VP’s at Google, LinkedIn, and
PayPal. 


Each person I spoke to was fascinating and knew I wanted to work
with them on this project if I could in some capacity. They all
got what I was attempting to do. 
Meeting Chuck Gillman

My big break came around 2017/2018 when I was in Omaha, Nebraska
at the Berkshire Hathaway meeting and was attending the annual
party I go to every year hosted by Whitney Tilson and Chuck
Gillman. I had been going every year since I was 18 and had
gotten to know both of them. Chuck has an outstanding track
record as a shareholder activist. He runs a family office and
only invests in microcap situations where he can do activism. He
focuses solely on that. I had shared with Chuck that I had a team
of people that I partnered with who had a background in turning
around companies focusing on organizational culture and that a
year 10 longitudinal study showed an average increase of 3-5x in
profits within 24 months of organizations doing the work. Chuck
was intrigued and had the humility to get that he had no idea how
the technology worked and was completely outside of his circle of
competence yet was totally willing to listen for as many hours as
it took to understand the process, how it worked, and get a good
handle on what we wanted to do. He immediately saw the
opportunity where others didn’t. I introduced him to John King on
the phone and he was immediate impressed by some of the formers
examples of organizations that had used this work such as the
private client group of CB Richard Ellis which seemed to defy
industry tailwinds during an extremely difficult time for the
industry and also Zappos which Tony Hsieh shared about his
influence of Tribal Leadership on the company in his book
Delivering Happiness and now gives out copies to all his
employees. 


Today I have a pretty deep bench of trained Tribal Leaders with
long track record of executive experience and turning around
companies that are ready to get on boards when duty calls.
Going Forward: Our Process

This is what our process looks like going forward.


 
Identity Microcap Targets

The first step is simply identifying companies that we could
bring Tribal Leadership into the organization. This is extremely
difficult and the hardest part. The criteria are very strict. The
market cap of the company must be under $400 million and ideally
below $200 million. On top of that, management must own 10% of
the stock or less. Then the management must be underperforming
for a long period of time due to incompetence and mismanagement
or simply because they’re corrupt. 
Talk To Existing Shareholders

However, we do things a bit unconventionally. Instead of taking a
position and then attempting to wage a proxy battle, we first
start talking to existing shareholders that already own a lot of
stock. If we win the election, we then buy a lot of stock in the
open market. Yes, it caps our upside but it also limits our
downside if the election doesn’t turn out. This is what Chuck has
been doing for several decades and it’s a very low-risk and
patient approach to being successful and getting people onto a
board where there’s activism opportunity. Chuck spends most of
his time networking with people who invest in small and microcap
stocks with the idea that at some point a small percentage of
these people will reach out to him with a company that has been
underperforming and management won’t work with them or take any
of their ideas and this is a last resort. Now, partnering with
Chuck, I have been taking calls on a weekly basis with
shareholders from all over the world and it’s been a fascinating
and fun experience to meet so many intelligent and interesting
people both here in the United States and abroad.
Screening Candidates

The next step is I examine the business model to see if I deem it
a candidate for Tribal Leadership. There are some businesses
where there really isn’t a shot at being able to do anything.
However, often what looks like a strategic issue or mismanagement
issue is merely a cultural issue. When you move organizations
from Stage 2/Stage 3 to Stage 4 - the managerial strategies and
behaviors naturally alter naturally as a function of the new
culture and profits increase by a factor of 300% - 500% within 2
years. Results start showing up in as little as 6 months. 


If the company seems like a fit, the next step is to call major
shareholders and see if they are interested in seeing change and
interested in new board members who will be aligned with
shareholders. If any of our team gets on the board, the salaries
will be extremely low and we will be incentivized with out of the
money options. Chuck has a long track record of being friendly
towards shareholders once he and/or his team gets on the board.
This will be no different….(remember I’m not re-inventing the
wheel here...just combining two wheels to create an ultra-wheel).
Paying Legal Expenses & Getting On The Board

Then the next step is we will pay all the legal expenses of the
Proxy Battle and we will do it knowing we already have the
support of large shareholders. If we know they will vote for our
slate, we will spend the money to make it happen. 


Once the new board members get elected who already are trained in
or have experienced Tribal Leadership for themselves, the next
step is actually transforming the culture of the organization.
Reorganization

One of the wonderful things is that this does not require
reorganization of any kind. The current structure and
configuration of a company work well with Tribal Leadership
because the kinds of benefits are in management and leadership
capacity and the ability to work together to resolve problems and
produce business results. Of course measuring results is
important. The great thing about this project is that the fact we
will only be working with public companies will make our
successes public. The first 1-2 situations will be the hardest.
However, as this is proven in public markets (vs ontological
coaching being proven outside of a fund structure for 40
years...I know, I know...it shouldn’t matter but it does to most
people)....my goal is to get to the point where people start
calling us to help them and this process becomes even easier.
There is some horseshit conversation that these are “soft skills”
which is far from the truth. The soft stuff is the hard stuff.
Measuring is easy. You measure before you start a project.
Measure after you finish a project. When you go from Stage 3 to
Stage 4, the results generally go from 3-5x in measurable
results, including the bottom line. There are a variety of
different metrics that we utilize as we go through the process.
Different metrics are appropriate for different circumstances and
cultural stages. For a run down on the different stages of
culture, refer to the Tribal Leadership TED talk, here.


 
Velocity In Results

It also doesn’t take long to implement a new culture. The actual
initial training only takes about 2 days. It’s intense with very
long days. Many people report it as the most valuable and life
altering experience they’ve ever had. That’s not hyperbole
either. After the 2 day program, there’s usually half day follow
ups every 6 weeks at the beginning until it becomes self
sustainable and really gets embedded into every facet of the
organization. Generally, it takes 18-24 months to elevate from a
Stage 2 or 3 culture to a Stage 4 culture. Results start to show
up within 1-2 quarters. 
The Myth Of Employee Buy-In

One of the concerns is how to get “employee buy-in” which is some
garbage taken from your traditional consultant/flavor of the
month who has some strategy or point of view they try to force
onto every employee. Employees roll their eyes while pretending
to go along because they need to play nice with the boss. It’s
the reason why most consultants are a total waste of money.
Motivational speakers are even worse. With Tribal Leadership
there is no buy-in. Instead we distinguish what is already there
in a way people have never seen before. To my knowledge it is
impossible to change people. The first step in implementation
(buy-in...except not really...will just look like that on the
surface) is that we first do a diagnostic that tells us where we
are culturally and the prevailing issues or predicaments that are
just not getting resolved. This is called “culture mapping.”
Then, we look to discover where there already is alignment to
create new overall strategies, using the “strategy model.” Then,
we drill down and do the work until each and every person has
their own map and their own self-designed strategy. Success
depends upon the degree to which people follow the strategies
that they created themselves. Normally, the people in the C-Suite
hand a strategy to the employees and demand “buy-in.”


The way we do it, we involve everybody in the design of their own
strategies and the wisdom of the overall strategy all at once.
No Use Of Force

Something we get asked a lot is if we aren’t forcing this upon
anyone, why would someone who is already very successful want to
partake in something like this. It’s a valid question and a key
issue. Those at Stage 3 ‘have it made’ and are in control of
those at Stage 2, so their incentive is predictably not great to
change their ‘I’m great- You're not’ point of view. However, if
the overarching interest of the organization is to elevate their
culture and the outcomes and results of the greater group, then
the Stage 2/Stage 3 culture must move to Stage 4. In order to do
this, the issue of ego and self-promotion on the part of the
Stage 3 people must be addressed. The organization will only move
to Stage 4 if the issue of the Stage 2/Stage 3 mentality has been
successfully addressed. The issue with Stage 3 will always show
up in the overall financial success of the company.
The Low Hanging Fruit Alpha

Another thing I get asked by nearly every hedge fund manager is
if there’s such a focus on shareholder value, why isn’t everyone
doing this? Of course the asshole response would be “because
people like you are closed off to this because you’re lazy and/or
immature in your thinking.” However, you can’t really say that to
anyone. I had this conversation recently with the COO of a
business unit of a major multi-billion dollar publicly traded
company that’s compounded by nearly 20% over the last 20 years.
They implement a similar kind of work at their business and as he
said, “it’s the last bastion of alpha because it’s low hanging
fruit that nobody is doing so there is no competition.”


The ‘shareholder value’ focus is a focus on the bottom line, not
a focus on the cultural vitality of the organization. Tribal
Leadership is focused on the well-being and effectiveness of the
organization. Ultimately, shareholder value is an outcome of an
effective and stable culture. The more effective the culture of
the people at work, the more effective their results. Our
philosophy and our supporting data have shown that if we
effectively attend to the well being of the people doing the
work, the quality of their work will show up in measurably higher
productivity.  
What’s Missing In The Prevailing Model For Shareholder
Activism: Icahn, Ackman, Etc

What we do is drastically different and also significantly more
effective than what is taught in modern day business schools.
Firms like McKinsey and basically every shareholder activist that
is using management models, cost cutting, etc is the modern
portfolio theory of the leadership world. That doesn’t mean it
doesn’t produce results. You can still make money using modern
portfolio theory over 50 years. You can still improve shareholder
value by cutting costs and improving efficiencies. It’s just
leaving a ton of extra value on the table that isn’t even that
difficult to attain. It’s low hanging fruit. Business schools are
strong on management and weak on training people to be leaders.
Management is based on control, domination, survival, and
ultimately, fear. Most management is a carrot/stick game. The
game is about managing for a result against a diminishing
resource - time. Leadership requires transforming the
relationships that people have while working together, mutual
respect, collaboration, and stability. The culture of an
organization is a function of the quality of leadership provided
and attended to. If the management disrespects the employee, the
employee will slow down and waste the most critical resource that
management has - time. If the management provides effective
leadership, the employee will respond by using the time
effectively. Employees who have the experience of partnership and
respect of their employers produce net superior results. 


Tribal Leadership builds sustainable environments where
leadership and partnership arise naturally. Our data supports the
point of view that a focus on culture and leadership produces
superior results in a more efficient and sustainable manner than
management techniques that focus on operational efficiencies
alone.
Nothing Wrong With Management Conversations

I’m also not saying there’s anything wrong with making operations
or management more efficient. I’m saying that there’s an entire
component that’s missing that’s leaving a lot of low-hanging
fruit alpha on the table. Put simply, Management and Leadership
are in and of two different domains. Management is about
efficiency and is the vital and necessary underlying craft of any
great company or organization. Leadership is about empowerment,
teams, and the relationship between people working on a team,
between teams to teams, and ultimately, an organization operating
as a single unit producing profits and creating shareholder
value. Leadership is in its own realm and requires a different
mindset and worldview. The leader must be a great manager - that
is a given - but he/she also must know when to step away from the
psychological limitations of the manager fixated on efficiency
and adopt the mindset of a leader who is exploring the creative
world of breakthrough into ‘out of the box’ thinking and hitherto
unknown or experienced effectiveness of the organization.
Culture Kills Off Strategies

Drucker famously said, “Culture eats strategy for breakfast.”


Business school strategies are mostly derived from HBS and
Michael Porter - a brilliant man. However, according to Peter
Drucker, at best, the Porter model is successful 30% of the time
on average. That is because the strategy is ‘imposed’ on the
employee and the employee has little or no input. Therefore, the
person who best knows the job and is actually doing it is told
what to do and how to do it. Predictably, the employee often
resists and is resentful. The strategy model we teach in Tribal
Leadership is between 70-80% successful. This is largely because
we teach the employee to design their own strategy, quarter by
quarter. They are ‘bought in’ by definition from the beginning of
the process and appreciate that their input is honored.
Furthermore, the strategy model we teach is simpler,
self-managing, and self-correcting. In essence, a more elegant
design. Furthermore, it allows leaders and managers to take
advantage of and capitalize on the inherent understanding of
customer data and other critical aspects of having an
organization perform at a high level and make its clients and
market happy.


 
ABOUT ERIC SCHLEIEN

Over the past decade, Eric has trained thousands of individuals
including board members of public companies as well as several
Fortune 500 CEOs. Eric specializes in organizational culture and
has become a leading authority on organizational culture in the
investment industry.


Eric has been investing for 15 years and has been using
breakthrough coaching methodologies for over a decade. Eric had
the insight to combine proven coaching methodologies with
shareholder activism techniques to create an entirely new model
for shareholder activism that was more reliable and created
greater sustainable results in a rapid period of time. On
average, Tribal Leadership produces a 3-5x increase in profits of
culturally troubled companies within an average of 24 months or
less.


Eric currently resides in Philadelphia, PA.
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