During the corporate takeover battles of the 1980s, the term “white squire” designated a significant bloc shareholder that management enlisted to deter or defeat unwanted bids for company control. A version of this classic tactic is playing out amid today’s proxy contests, where management cultivates its quality shareholders — “QSs,” those that are long-term and focused — to ward off or beat back overzealous shareholder activists.
While sometimes controversial back in the 1980s, today the approach appears win-win-win, benefiting management, the white squire and all other company shareholders, according to researchers Alon Brav, Dorothy Lund, and Edward Rock. They call such investments “validation capital,” a QS vouching for management and its direction. Managers would do well to cultivate such shareholders to take advantage of this approach.
In the heyday of hostile corporate takeovers, prominent white squires included Ken Miller’s Lodestar Group, Harris Associates, Roy Disney’s Trefoil Capital Investors, and Lazard Freres’ Corporate Partners. Some were controversial when arrangements were perceived as the payment of “protection money,” with sweet side deals for the shareholder. But most were savory, all were legal and Lou Lowenstein, a Columbia Law professor, called them “buddy clubs.”
Perhaps the most famous example of QSs who benefited themselves and all other shareholders alike is Berkshire Hathaway
and its CEO Warren Buffett. In the late 1980s, Berkshire invested in preferred stock of several companies, including Gillette and Salomon Brothers. Terms such as high-dividends and attractive conversion rates were favorable to Berkshire. In exchange managers knew they were getting valuable intangible commitments of autonomy and permanence that deterred hostile bids. Those very traits helped such companies prosper, benefiting all shareholders.
In recent years, more companies have enlisted QSs in this approach. While the definition of QS excludes short-term traders and pure indexers, QSs are otherwise diverse. For instance, they have different engagement styles, ranging from the subdued approach of Berkshire and Buffett to the highly visible activist approach of Pershing Square, Third Point, and ValueAct, all of which rank high for both shareholding periods and concentration.
The circumstances surrounding the contemporary use of white squires vary widely, as do the roles that various types of QSs can play. In the simplest case, a company already has one or more significant QSs in its ranks that assert themselves as white squires when warranted to address overzealous activism.
In 2018, for example, activists at Elliott Management signaled impatience with managers of Pernod Ricard
the spirits firm with a substantial (16%) family ownership. One of its QSs is Tom Russo, who manages $12 billion at Gardner, Russo & Gardner including $850 million worth of Pernod Ricard shares.
At that time, Russo weighed in publicly on behalf of management, a significant signal to fellow shareholders: “You have a classic case of a business that could show a lot more today, if they chose to. I still think our best course of action is to invest meaningfully at the expense of operating margin today for more wealth tomorrow.”
As another example, in 2019 activist Cruiser Capital acquired a 2.5% stake in Ashland Global Holdings
and nominated four directors to its board. In response, the company reached out to its major QSs, including Neuberger Berman, a shareholder of at least five years with 2.8% of the shares. They formed a united defensive front, and the activist withdrew.
A more complex situation occurs when an existing QS turns hostile and management needs to enlist other QSs as white squires. Take Renaissance Re Holdings (RenRe)
whose QS base included TimesSquare Capital Management, a shareholder since at least 2010, holding 2.4%. While historically engaging with management in a low-profile way, in 2018 TimesSquare Capital publicly prescribed a strategic review, something activists normally do. In response, RenRe issued a large new equity stake to long-term business partner and venerable QS, State Farm Insurance, and closed a pending acquisition, of Tokio Marine, paying partly in stock. TimesSquare Capital quietly retreated.
Other companies facing stirrings for strategic reviews turn directly to activist shareholders with track records as QSs. For instance, in 2013, ValueAct appeared to be considering challenging Microsoft’s incumbent management in a proxy fight, acquiring a 1% stake. Rather than rebuff, Microsoft
engaged, giving ValueAct a board seat and working diplomatically to avoid a costly battle. In 2016, Seagate Technology
sought ValueAct out to take a 4% position and invited it to be a board observer, an example of engagement that forestalled disruption by other activists.
Courting and cultivating QSs — whether those engaged quietly or publicly — offers companies and management many advantages. Besides curbing overzealous activism, these include offsetting short-term pressure that transients stoke and countering the growing power of indexers and their proxy advisers; a brain trust to contribute constructively to strategy; and, as the evidence shows, superior performance. Managers have always welcomed long-term focused capital and today can benefit themselves and their shareholders by enlisting QSs to supply validation capital as well.
Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University. His books include “Quality Shareholders,” “Dear Shareholder” and “The Essays of Warren Buffett.” Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice chairman of the board of Constellation Software.