On April 9, shareholders gathered at the St. Regis hotel in New York City to see exactly who had emerged as victorious in the Biglari Holdings (BH -2.18%) proxy battle, which threatened to replace the entire board of directors. I wrote about all the accusations leading up to the vote here.

Once the dust settled, all of the incumbent board members were reelected, including the controversial Chairman of the Board, Sardar Biglari. However, given that Sardar Biglari owned less than two-tenths of shares outstanding, this can hardly be classified as a monumental victory for the activist shareholder. As a matter of fact, I'll call this one a lose-lose. The slate of those running against Biglari was weak and their plan for change was even weaker. Furthermore, it appears this costly battle will likely be repeated next year.

A while back, Biglari pulled capital out of Steak 'n Shake to acquire nearly 20% of Cracker Barrel for about $240 million. That stake now resides in Biglari Capital Corp. (BCC), a subsidiary of Biglari Holdings. It's clear that shareholders aren't satisfied with Biglari's dual role as CEO of Biglari Holdings and general partner of Biglari Capital, and at the meeting, Biglari refused to answer a question about the regarding how Biglari Holdings has decided to transfer its capital over to BCC.

But the strongest statement from shareholders involved say on pay. The vote on executive pay, which was nonbinding, sent a loud warning signal to the board of Biglari Holdings. Only 51% approved of Biglari's pay package, which involved a $34 million performance bonus based on the returns generated by The Lion Fund, or TLF, which is owned by BCC. Those assets are mostly funded by Steak 'n Shake and are invested in Cracker Barrel stock. The bonus involves Biglari taking 25% of all returns above a 6% hurdle rate. Last year, TLF earned 20.6%, which outpaced the S&P 500 by 6.9%. Meanwhile, Biglari Holdings' own stock declined 14.9% vs. a 13.7% gain for the S&P 500. However, the stock has handily outperformed the S&P 500 since Biglari took the reins during the financial crisis in 2008 (up 267.1% vs. 91.9% for the index).

What has Biglari done?
Biglari has taken some token steps to address investor concerns.

  • First, he named an independent director -- a longtime family associate of Biglari, which makes him independent in name only.
  • He hired a compensation consultant to review the compensation plan at Biglari Holdings. Hmmm. These compensation consultants are largely to blame for the ridiculous executive compensation practices seen over many years. The result has been a dramatic spike in executive compensation. Now the average CEO earns 331 times as much as the average employee and 774 times that of a minimum wage earner. The average CEO earned $11.7 million in 2013, or about one-third of Biglari's bonus.
  • Each director at Biglari Holdings will now be required to own five times his or her annual director's fees in BH stock. In Biglari's words, "we are eating our own cooking." Biglari pointed out that he and Vice Chairman Phil Cooley have not sold a share of BH stock. They also do not receive any stock options.
  • His last move involves transferring capital from Steak 'n Shake to The Lion Fund and purchasing BH stock, which he can use to vote his support for the current CEO of Biglari Holdings (who, you'll remember, is Sardar Biglari). The Lion Fund is indeed the largest single shareholder of BH stock. From Dec.18, 2014, through April 14, 2015, Biglari bought an additional 55,382 shares of BH stock at an average price of $401.21. That capital came from a shelf registration performed last year, where the company issued newly minted shares of the stock at the price of $250. This is in essence selling for $250 per share and then buying it back at $401. I'm pretty certain that is one move he did not take from Warren Buffett's playbook.

What should Biglari do?
I'm not a compensation consultant, but I've invested in many successful companies that do not engage compensation consultants and do just fine. Here are my suggestions to Sardar Biglari: 

  1. Get rid of your poison pill royalty agreement. This is a me-first tactic and doesn't inspire confidence among investors.
  2. Retire the shares you've purchased and held in The Lion Fund so that all future returns benefit the true owners of the business. This also avoids the conflicts of interest inherent in using shareholders' capital to acquire shares and then vote them for your own interests.
  3. Create a longer-term incentive rewards system that matches your long-term investment philosophy. It turns out that investors don't like the idea of you banking a $34 million bonus in a year when BH stock underperformed its benchmark by 28.6%. But this is easy to remedy. If you don't plan to sell your shares and you're investing in turnarounds like Maxim, it doesn't make sense to get paid on annual performance. A reward for investments and the operating business based on five-year rolling periods makes total sense here. A more suitable hurdle rate of a 10% growth in book value seems appropriate for the operating business and the 6% hurdle for investments with a high-water mark seems OK.

During Biglari Holdings' annual meeting, Cooley said, "I like deep-diver, educated shareholders." Well Phil, the best way to get informed, deep-dive shareholders is to truly treat them as partners in this business. As Charlie Munger says, "the best way to get what you want is to deserve it." I bet that's something you won't hear from your compensation consultant.