Cadbury and Shareholder Democracy

The argument in favor of shareholder democracy (and the argument in favor of making the expression of this democracy ever more direct) has long been that the owners of equity are the residual risk-holders of the company, and that as such they ought to be making the decisions on which those risks turn.

Why is it so much easier, so much more common, to be nervous as a passenger on an airplane than to be nervous driving one's own car? The latter is more dangerous, but while driving the car you feel that you are in control of your fate, whereas while a passenger on a plane (or a bus for that matter) a perfect stranger has control of your fate. Owners of equity naturally want to drive the car.

One of the counter-arguments to shareholder democracy, or any very direct expression thereof, is that many of the shareholders have a very short-term perspective. They don't intend to maintain the car properly, so to speak, because they plan to sell their interest in it after one quick trip. Managers and directors with a more long-term perspective are to be trusted. As are the institutional investors typically in for the long haul, like pension fund managers.

These theories and arguments collide directly in the emerging bidding war for Cadbury. Look for example, at a story Andrew Ross Sorkin of The New York Times recently published, "Do Stockholders Really Know What's Best?".

The money quote from Sorkin, "Indeed, one parlor game in London has been to guess how much of Cadbury’s long-term shareholder base has already sold out to arbitrageurs, whose goal is to see the company sold as quickly as possible and then move on to another deal .... People involved in the deal estimate that about a third of the shares have already changed hands, moving from long-term shareholders to hedge funds. Those funds, said Joseph Grundfest, a professor at Stanford Law School, 'have a long-term time horizon of about 12 minutes.'"

Frankly, such an appeal leaves me cold. After all, every completed transaction has two parties. These short-termers have bought up a lot of stock from the institutions with longer-term horizons that used to hold it, you say? Why have those institutions sold it? Because, in whatever temporal horizon interests them, some other investment looked better, right? They sold to get the cash to put that cash somewhere else.

When and why did Cadbury cease to be an attractive place to have their assets for those long-termers? We can hardly blame that on the short termers who (this is inherent in this diagramming of the situation) hadn't bought yet.

I don't know what Cadbury's fate is going to be. But it seems to me that arguing that it ought to remain an independent company forever because that is the long-term best thing to do, because only short-termers buy stock is just ... well, silly. People who 'reason' that way should put the chocolate down and try some brain food.

A Tale of Two Dick Fulds

Gasparino or Sorkin. Who are you reading this Fall? about last Fall's ... um, fall. Gasparino is the author of The Sellout, a new book outlining what Gasparino sees as the 30 year long history behind the financial meltdown of 2008, finding fault in both Wall Street greed and government mismanagement. Sorkin is the author of Too Big to Fail, a bigger book that offers more of an "inside story" on the crisis and the bailout efforts it inspired. Or, like me, you may be obsessively reading both.

Dick Fuld, I'm guessing, is reading both. He's the former CEO of the now defunct broker-dealer Lehman Brothers, and Time magazine gave him a spot on its list of "25 People to Blame for the Financial Crisis," here.

Both Sorkin and Gasparino give an account of a certain dramatic incident in Fuld's rise up the corporate hierarchy at Lehman, from his days as an impatient young trader. Here is Sorkin:

One day he approached the desk of the floor's supervisor, Allan S. Kaplan (who would later become Lehman's vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signalling loudly that he was ready for Kaplan to do his bidding.

Kaplan, cupping the receiver with his hand, turned to the young trader exasperated: "You always think you're the most important," he exploded. "That mothing else matters but your trades. I'm not going to sign your fucking trades until every paper is off my desk!"

"You promise?" Fuld said, tauntingly.

"Yes," Kaplan said, "Then I'll get to it."

Leaning over, Fuld swept his arm across Kaplan's desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly, "Will you sign it now?"

-----

A version of that story has been published before, but Sorkin in his notes assures us that his own reporting is responsible for the level of detail with which he tells it. Curiously: Sorkin lets the story expire and moves on to later incidents in Fuld's career -- he doesn't close out that anecdote by telling us whether Kaplan actually signed off on the deal or not. Here it is Gasparino, who gives the matter only four sentences, who is more informative.

Fuld, as most people knew, even early in his career, was among the most aggressive traders at the firm, something he cultivated to bully his way through the management ranks. When the loan officer said he 'needed to clear' his desk before approving the trade, Fuld took matters into his own hands and cleared the man's desk for him -- literally by shoving the papers to the floor.

The officer was stunned, but he approved the trade. And Lehman made money on it.

So never make the mistake of using the expression "I have to clear my desk" while in the presence of a Type A personality.

The compare-and-contrast exercise here is worthwhile, I think. Sorkin gives to Kaplan a bad-guy characterization, so that we understand and even sympathize with Fuld's rudeness. Sorkin for example has Kaplan "deliberately ignore" Fuld when Fuld first approaches his desk. And then he has Kaplan telling Fuld off before he gets to the "clear my desk" remark. For Sorkin, I think, the men (and a few women -- such as Erin Callan, Lehman CFO) at the center of the crisis were facing grave challenges and doing the best they knew how to save their companies in the face of those challenges. Heck, if Kaplan had been more central to Sorkin's story he might not have been fitted for the Snidely Whiplash moustache in the telling of that Fuld-as-young-man anecdote.

For Gasparino ... well, did I mention that his book is named "The Sellout"? He is looking to assign blame. They weren't facing challenges in 2008, they were working through a disaster of their own creation. Since Fuld is a prominent recipient of blame, there is no need even to give Kaplan's name. The story is only meant to show that the Gorilla routine was a deliberately adopted tactic whereby Fuld bullied his way through management ranks.

I prefer Gasparino as a writer, for both precision and concision; I think they both are sadly deficient as analysts, though if I were to write such a book I think I'd adopt something more akin to Sorkin's tone.