Biglari Holdings Annual Meeting Notes: Is The CEO Overpaid?

Includes: BH-OLD, BRK.A, BRK.B, CBRL
by: Charles Hwang

Sardar Biglari and Phil Cooley practice what they preach. They behave differently from typical executives. They are not entitled to options, restricted stock, or any other regular CEO perks. One shareholder questioned his compensation plan which is similar to a hedge fund payout structure. Sardar Biglari is paid $900,000 per year which is higher than Warren Buffett's $100,000 annual salary. However, it is much lower than the average $12.9 million CEOs were paid last year.

In addition, Mr. Biglari receives an incentive bonus. He needs to grow the company's book value above the 6% hurdle rate. If he does, he receives a 25% bonus on the exceeded amount, capped at $10 million per year. If he performs poorly one year, then a high watermark is set the following year. If Sardar Biglari receives a big bonus, shareholders will also be richly rewarded.

Many investors view his hedge fund compensation structure to be a major red flag. I personally believe he deserves to be adequately compensated if he accomplishes his goals and grows the business. As long as he manages Biglari Holdings with integrity and sound character, I will continue to invest. If any major red flags surface, such as Mr. Biglari selling BH stock or book value increasing due to an accounting change, then I will begin to liquidate my position.

Sardar Biglari encourages the executive board at Cracker Barrel (NASDAQ:CBRL) to purchase the company's stock. Based on insider data, Sardar Biglari and Phil Cooley have both continually purchased Biglari Holdings (NYSE:BH-OLD) in the open market . Mr. Biglari purchased very large amounts during the "Great Recession". Recently, they have both been purchasing stock in smaller amounts.

This is a continuation of my notes from Biglari Holding's 2012 annual meeting. Five hours of notes can produce an entire novel but I've kept it succinct. As I stated before, there may be omissions or errors, which are purely unintentional. These are NOT verbatim quotes. I have summarized the answers to keep it concise. I think most shareholders will find these questions to be the most interesting ones.

21. Do you plan to lower your salary?

Sardar Biglari: You want me to lower the compensation? Why?

Shareholder: So you can use the proceeds to invest for shareholders.

Sardar Biglari: Should I go to zero? That is an option. 82% of shareholders voted in favor of the compensation. Would you go to your hedge fund to reduce the manager's compensation?

Shareholder: No, as a follow up, do you think you will increase the hurdle rate?

Sardar Biglari: If people don't like the compensation, then don't invest in the stock. The scenario does not change when you go to a partnership versus a corporation.

22. What does the Board do and can the $250,000 combined compensation be reduced?

Sardar Biglari: They have several meetings throughout the year and are involved with several committees. CCA Industries (NYSEMKT:CAW) which is a lot smaller company pays $5,000 per meeting versus our $3,500 per meeting. We don't want everyone to agree but this is a jockey stock. Do you want to be partners? If you do, you are signing up for this arrangement. Do I want to change our way of operating to appease the minority or should I follow the endorsement of the majority?

Phil Cooley: Harvard Business School Jay Lorsch published a great book about Board of Directors and it's a great read to see what the board does. Our CEO gets a salary and performance if he does a good job. He does not get any perks other typical CEOs get. He must increase Biglari Holding's book value by at least 6% to receive a bonus. We don't get paid for being lucky. We get paid for performance. If he fails, he needs to overcome the higher watermark. It is ludicrous to ask for a lower salary for a CEO who is performing. You should look at other executives' salaries. A lot of companies don't pay for performance. We do. We look for economic change and not accounting change. I think our compensation system is fair. He is capped at $10 million. When our CEO makes money, then we all make money.

23. Do you know the difference between the new units versus the old units?

Sardar Biglari: The low volume stores are sometimes in highly penetrated markets. When we enter new markets, we try to get everything right so we can launch it right. Since 2004, Cracker Barrel has been opening locations near its other units so it's cannibalizing itself. Some Cracker Barrel locations are only 12 miles from its other restaurants. For Steak 'n Shake, there are 4 units producing over $3 million. The objective is to get to $2 million on average. We are correcting poor decisions made before we purchased Steak 'n Shake.

24. Can you talk about your time value when you are an activist investor?

Sardar Biglari: I don't like the term activist. When we talk about control investments, there is more money to be made. I don't enter an investment looking to be an activist. I look for undervalued companies with great brands. We may be able to unearth undervalued investments. When it comes to control positions and I can't discuss with the company privately, I start to write letters. I think I allocate my time properly.

25. How do you price your products and create good value for the customers?

Sardar Biglari: There are 3 pillars to the value equation: product quality, service and price. On those 3 pillars, there is a relationship to customer traffic. Great companies not only survive but thrive in bad economies. Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) are great examples. Sears Holdings (NASDAQ:SHLD) use to command 2% in retail 50 years ago. Then Wal-Mart opened and slowly dominated. A. Schumpeter wrote a book talking about "creative destruction". You see it over and over again. Sam Walton didn't create something new. He focused on the customer more than anyone else. He was fighting against the bureaucrats. In 1972, Wal-Mart became a public company so you can view their annual reports. It's fascinating how they were able to achieve these numbers in the 1970s, 1980s and 1990s. An entrepreneur is not always someone who creates a new venture. It is someone who shifts a low productive business to a high one. That's what Sam Walton did. He revolutionized the industry. Sam's Club was formed in the 1980s but Costco did a better job than Sam's Club. Costco performed and executed better. In my mind it is being entrepreneurial and thinking about the customer and not the profit margin. We don't mind if the ride is bumpy as long as we know where the destination is.

Phil Cooley: We struggle to be a low cost producer. We need to work on the discipline of pricing. Increasing prices may benefit us in the short term but it won't work in the long term. Pricing discipline is key and Sardar has pricing discipline.

Sardar Biglari: The quality component cannot be understated. I don't start with costs. Bring me the very best and compare it to everyone else. I don't worry about cost. I have tremendous tolerance for short term pain if there is long term gain. Amazon is fanatical about their customer. Costco has remained a great business because it has maintained value with a great proposition.

26. In light of Warren Buffett's news (regarding his recent diagnosis of prostate cancer) and considering this is a jockey stock, do you have steps in place if something were to happen to you?

Phil Cooley: A jockey stock has jockey risk and it is important to have a succession plan such as Apple Inc.(NASDAQ:AAPL) and Berkshire Hathaway(BRK.A, BRK.B). It is important for the board to discuss a succession plan. We talk about this a lot and are fully cognizant of your concern. We are fully prepared for any situation.

Sardar Biglari: Clearly there is a difference 10, 20, 30 years from now. My hope and anticipation is that Biglari Holdings as a brand is doing really well. We are in an embryonic stage. It is important to discuss succession and I don't think I should have any health issues. I am responsible for a lot at Biglari Holdings so it would be irresponsible not to talk about it.

27. What keeps you up at night? What worries you?

Sardar Biglari: I sleep very well at night.

28. What kind of brand are you trying to build? What does it stand for?

Sardar Biglari: I want the brand to stand for strength, quality, and value. The holding company is a solid company. Regardless of what happens in the marketplace, it will survive. We are not looking to flip businesses so that will signal how we operate. We are building a reputation and ultimately a brand. Over the coming decades, we want to translate that brand into more value.

29. You developed a reputation to be combative towards companies. How does that reputation translate in the marketplace?

Sardar Biglari: When we talk about other companies, we talk about people. You can speak to the person sitting in the front who worked at Fremont Michigan Insuracorp (OTC:FMMH). It is not true that we like to burn bridges. There are certainly people we are trying to remove and we make no apologies towards it. We are pursuing truth which is the fountain of excellence. We are always trying to get to that point. We are trying to attract the right people at various levels. While the situation may be combative, it is not hostile to shareholders but it may be hostile to a few people. Steak 'n Shake had a proxy fight and ultimately we won. Do you want to partner with me or the predecessor? We are not going to forgo proxy fights. Not only is it more lucrative, the negative campaign is not going to stick. Am I going to make more money with this individual? Does this individual have a lot of integrity? We are open to do friendly deals.

30. Bill (former board member on Fremont) seems like an excellent addition to the board. Can you talk about it?

Sardar Biglari: When we made a bid for Fremont, Fremont's board didn't want it to happen even though shareholders wanted a transaction. I called Bill and I met with him. He seemed quite practical. He wanted us to buy it if we were willing to pay and there was a price we were willing to sell. I had high respects with Bill after meeting with him. Then I called him and asked him to join our board. Yesterday was the real first board meeting with him and it was quite good.

31. Do board members own Biglari Holdings?

Sardar Biglari: Our board is not paid that much and do not get stock options. They are invested in the stock. They have purchased stock in the open market. Board members are buying. They are not receiving it through the company which is how some companies operate. $200,000 is what one director gets paid at Cracker Barrel. $250,000 is the total compensation paid annually to the board at Biglari Holdings. I don't like comparisons but this board is not paid that much. We are about pay for performance. Excellent pay=excellent performance. This is not a typical CEO/shareholder relationship. There is a failure in performance at Cracker Barrel. If there is a failure in performance at Biglari Holdings, we will fold it up. Compensation is going to be high here if we are successful. If it bothers you, get out. If not, we will make a lot of money in the future.

I will have most of my money in Biglari Holdings stock. I don't need a 3 year lockup provision. I do not plan to sell any stock. We are working backwards. We own a small chunk now and are slowly building a position. Most boards sell their stock. This board is buying stock. Over time, you will see more of that. The interests are aligned. When Phil joined, there was no remuneration for him. We started small and slowly worked to this position. I did not purchase Steak 'n Shake with the idea to turn it around. However, when it imploded, I decided to turn it around. I know the structure we have makes sense. This is how we operate. We will not make a decision based on other people's opinions. Once I decided to create the holding companies and amalgamate the companies, it became a great vehicle.

Phil Cooley: I agree with you. I purchased all my Biglari Holdings stock like you. I expect to die with my Biglari Holdings stock. We don't have options or grants. I call up my broker or go online and buy stock. This is old fashioned but this is who we are.

32. If Biglari Holdings had the opportunity to own Cracker Barrel, can we?

Sardar Biglari: Cracker Barrel is doing a great job selling the idea that we want to control Cracker Barrel. It is not possible to control the company with 2 board seats. I can't comment if I will buy the entire company. The process is dynamic. There is no master plan. We are trying to make a ton of money.

33. Where are the optimal places to open new restaurants?

Sardar Biglari: It's driven by franchise interest, not by geography. We are looking at teaming with the right partner and growing out that way.

34. What is the rationale for uniform pricing?

Sardar Biglari: Uniform pricing has been with us for a long time. We had uniform pricing since late 2008. With regard to franchisees, we delayed that. Franchisees lagged the turnaround versus our company-owned units. We made a decision that we will not raise prices. I don't know if there are any restaurants that do uniform pricing.

35. If you were standing here and could ask a question, what would it be and what would be your answer?

Sardar Biglari: What book have you read recently? Thinking, Fast and Slow by Daniel Kahneman.

Phil Cooley: Talent Code by Daniel Coyle

36. Besides Buffett, what have you learned from Eddie Lampert or other financiers who've taken over other companies?

Phil Cooley: From Eddie Lampert, I learned it is very difficult to turn around a retail company. He was doing $55 billion and is now doing $40 billion. I think he's a great financier but I don't know if he's a great retailer.

Sardar Biglari: I've given you examples of people who have done really well. There's a lot to learn from many people's concepts. Henry Ford made one of the best marketing decisions and then one of the worst. He wouldn't change the color of the car. He made them all black. He would not budge. There's a lot to be learned from other people.

37. Back to book value, the land was purchased for $166 million. How old is that land? What is it worth?

Sardar Biglari: We will not provide you the value of the property but it was purchased in the 1990s and early 2000s.

Phil Cooley: Land is not worth anything unless it can be used.

38. Do you plan to open new Signature restaurants in other major cities?

Sardar Biglari: The rent is very high here. We won't have that problem in most cities. We will take the learning from opening in New York City and open them up in other cities. When you go through these processes, you learn a lot. We still have a lot to learn with the Signature concept. Signature is a very different model.

Phil Cooley: I find it difficult to improve on the Signature concept. I really enjoy it.

39. How is Western Sizzlin doing?

Sardar Biglari: We opened a few new units for Western Sizzlin. It is a buffet operation. They are producing $2.5 million each. Same store sales are stabilizing and increasing. It is a small portion for Biglari Holdings. We don't have as much control over the franchisees but the chain continues to produce $3 million pretax.

40. Are there industries where you can create more value?

Sardar Biglari: There are quite a bit of industries. For example, in insurance, management thinks on a short term basis. Sometimes when they are not supposed to write business, they still continue to write business. Cracker Barrel shouldn't be opening more restaurants but they still do it. Retail is not much different from restaurants. There are a lot of CEOs that I would like to see removed from the restaurant business. Maybe I should go to the next question before I start listing names. I think retail is tough but I am baffled by the decisions that are made. I can see Biglari Holdings involved in a variety of industries. Cracker Barrel has a great brand and great real estate but the management is wasting money. Buying back the stock can create value. There are a number of ways to create value at Cracker Barrel.

41. What is your plan for Cracker Barrel?

Sardar Biglari: Our goal is to maximize return for Biglari Holdings. We would ideally purchase the company. When we purchased 17% in Cracker Barrel, we were looking as if we owned the entire company. Take a look at the S&P 1500. Cracker Barrel has failed on a 1,3,5,7,10 year return compared to the S&P 1500. They have poorly performed. It is asinine to think we will be detrimental to the company. Some things don't make sense but they happen. We need to make it clear we are in it for the long haul. They have spent $5 million to make it appear things are better. Ultimately, we need to get more customers through the doors. As we got more involved, Cracker Barrel started cutting the wrong things such as training. There are many ruinous decisions when someone is trying to make something appear better than it is.

Phil Cooley: Many people have trouble with discipline. It is a human frailty. Sam Walton is very disciplined. Sardar is very relentless and disciplined. It is a rare commodity. I have trouble doing it. I have my own limitations. Sardar has done it well and I give him credit for it. There are few people that have discipline.

Sardar Biglari: Investing is like racing, it's not how it begins. It's how it ends.

42. Are there benefits to a low interest rate environment?

Sardar Biglari: We took advantage of it at Steak 'n Shake when we took on debt.

43. Were you able to make money on Advance Auto Parts?

Sardar Biglari: Yes. We could have made more money if we tendered the stock. We rescinded the tender to protect the shareholders. We felt that was the right thing to do.

No one had any more questions so the meeting ended.

Disclosure: I am long BH-OLD, BRK.B, SHLD.

Additional disclosure: Since I own BH, I indirectly own CBRL.