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Harry Long is the inventor of Hedged Contango Capture and Hedged Convexity Capture and is the Managing Partner of ZOMMA, the world's most innovative strategy index creator. Mr. Long is a globally recognized expert on the research and development of quantitative investment strategies. The ZOMMA... More
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  • Seize the Moment and Fight for America 1 comment
    Jul 29, 2009 2:35 AM | about stocks: FMMH

    Once more unto the breach, dear friends, once more

    --William Shakespeare, Henry V

    American business is at the cusp of the greatest potential reform in the history of our nation. While many are looking to Washington for answers*, the only lasting reform which can lead to growth must come from the owners of public corporations. Who else has the pure incentive to fix our problems?

    Unfettered proxy access (sans takeover restrictions), the elimination of staggered boards, and the legal abolition of poison pills are key structural reforms which will be key to economic prosperity and meeting the competitive gorilla of China.


    However, even without these reforms, populism and shareholder-led capitalism have never before been so totally aligned. We must seize this moment. Saving companies is about saving America and American jobs. Saving companies is about preserving the tradition of American ingenuity and innovation. Saving companies is about preserving everything that was once great about this nation and can be great again. This is a fight for our American way of life and for our values—values which some executives have forgotten.


    What is the nature of the enemy and what tactics work? This is trench warfare, and the enemies are greed, hubris, illogic, pride, vanity, stupidity, and incompetence. The main thrust of all reform must be to shed light on these negative values which hurt our country and our companies. Light has a cleansing quality, to use the oft-quoted cliché. And it's true—from Watergate, to the Pentagon Papers, to the scandal in your local government, to Enron. This is not a battle of personalities—this is a battle about values. In life, people with stronger frames of reality win against those with weaker frames of reality. Think rational John Paulson shorting subprime vs. idiot banks making subprime loans.


    Good values, if they are advocated for strongly, are always stronger frames than bad values. Bad values fear transparency, openness, investigation, exposure, debate and censure—think Enron, communism, and corrupt politicians. Good values shine with exposure—think Warren Buffett, Charlie Munger, Walter and Edwin Schloss.


    Which tactics work? I prefer to do things in the old-fashioned gentlemanly way. I call executives privately, express my concerns, and start a dialogue. Often, it works. However, sometimes it does not. Some executives suffer from bad breeding and do not return phone calls. What do you do then? People may not like to admit it, but the old-fashioned public flogging in the town square is fantastic. It plays upon the sad psychological phenomenon that most people refuse to change bad behavior until they are shamed into it (we have all seen this with politicians). If you have done your homework, know the facts (sometimes they are so glaring and scandalous as to be obvious), and have good ideas for improving your company:

      1. Start a blog! (executives, employees, competitors, customers, and suppliers read them obsessively, it freaks them out, and it gets their attention—trust me, I know from experience www.buildfremont.com [link] It works even better if you email/snail mail the web address to investor relations, company directors, other investors, and post it on message boards.

      2. Make sure your facts are unimpeachably accurate. This is what gives you credibility and the ethical high ground (along with being right in your analysis and suggestions).

      3. Criticize people responsible for bad behavior/performance by name.

      4. Be fair—praise people in the organization who are doing good by name as well.

      5. Be specific about what is going wrong.

      6. Use numbers (they can all be found at www.SEC.gov [link])

      7. Write a clear narrative.

      8. Propose practical solutions.

      9. Publish on www.blogger.com [link] for free and keep costs low.

      10. Write articles for sites like Seekingalpha.

      11. Get to know intelligent people in the activist investor community and start a movement. Tap into The Official Activist Investing Blog (activistinvesting.blogspot.com) and The Icahn Report (www.IcahnReport.com). Read David Einhorn's Fooling Some of the People All of the Time. Study Daniel Loeb.


    There is a good chance that if you do items 1-10, you will get a call from the management team that was ignoring your concerns. This may seem like a victory, but remember—at this point (you already tried it the old-fashioned, gentlemanly way) you are dealing with low quality people who respond to strength, not manners—just like the school bully. Chances are they think a call or meeting will appease you. But what you want is substantive change. If the meeting/call leads to reform, great, your story ends here. But if it doesn't, what are the next steps?

      1. Go to the press. Corporate governance is a hot topic. Seize the moment. Be creative.

      2. Ask questions on the company's conference call. Sometimes it is closed to everyone but sell-side analysts, but often, anyone can ask questions. This is one way Jim Chanos famously exposed Enron.

      3. If you think the company is doing something illegal, contact the SEC and state securities regulators in writing.

      4. Nominate yourself or someone else to the company's board. It is surprisingly easy to do.

      5. Call/write institutional investors such as CALPERS with your concerns. Pension funds have been at the forefront of corporate governance reform. These institutions have the clout to get your issues a fair hearing.

      6. Present your case to activist hedge funds.

      7. Write/call board members directly. Some will remember that their job is to represent shareholder interests. Some will fear for their director's fees if management hears they are speaking with you and will hang up on you. All of them will be surprised you are reaching out to them.


    Get to know the field. This past year, many traditional activist funds have had awful performance. Some have closed down. There is a vacuum of interest among the hedge funds, especially in the microcap space, where individual investors need to stick up for themselves and push for reform. Transparency, good corporate governance practices, and operational performance are the pillars of shareholder value at any public company. Focus on these, and you will be doing your part to improve our country. The Founders often noted that the prosperity of the nation was rooted in the virtue of the republic. We cannot have prosperous companies without virtuous owners who demand the same of management.


    Fortunately, there are many wonderful American businesses. Success if a choice and failure is a choice. If you encounter greed, hubris, illogic, pride, vanity, stupidity, and incompetence at firms in which you invest, show them no quarter. Make no mistake--you are fighting for the soul of our country. Why should executives get rich while investors suffer and workers suffer after the inevitable layoffs? Companies which successfully implement values, philosophies, policies, risk control systems, and actions geared towards transparency, strong corporate governance, and sustainable growth will not only see profits increase, but will also gain the support of the investment community and will be able to create jobs.


    At companies, as in America, either we all win, or we all ultimately lose.



    *It must rather be akin to banging one's head against a wall after the “success” of government regulation at Fannie and Freddie, the Community Reinvestment Act, the cronyism of the bailouts, the upending of our property rights, and the blatant European-style socialism coming from Washington, D.C. every day

    Disclosure: Harry Long owns FMMH shares directly, through partnerships, and through trusts. To the best of his knowledge, certain of his family members own FMMH shares through partnerships and trusts. Such ownership may change at any time.

    Stocks: FMMH
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  • Andrew Shapiro
    , contributor
    Comments (2193) | Send Message
    The SEC's minimalist proxy access rule leaves small company governance behind.


    See my instablog post at


    25 Aug 2010, 09:22 PM Reply Like
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