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Letter to the Board of Biglari Holdings

by NFI. Average Reading Time: about 2 minutes.

Secretary of the Corporation
175 East Houston Street, Suite 1300
San Antonio, Texas
78205

May 5, 2010

To the Board of Directors:

In light of the company’s recent decision to implement a new incentive bonus agreement for its CEO and Chairman, Sardar Biglari, we are writing to express our concern.

The current system, as proposed, is ridiculous by itself and, additionally, runs contrary to the ethos Mr. Biglari claimed to have when nominating himself for election to the Board of Steak ‘n Shake.

The decision by the Board of Biglari Holdings to accept such a generous and easily manipulated compensation system, demonstrates they either fail to understand the nuances of the proposal or they are simply unwilling to take a stand against Mr. Biglari, ignoring their obligations to shareholders.

* * *

Let us remind the board, of what Mr. Biglari, then attempting to gain a Board seat on Steak ‘n Shake, said with respect to how executives should be compensated.

In our assessment, the variable element of the compensation package should be tied to the executives’ ability to generate free cash flow and to earn a high return on invested capital.

Mr. Biglari continued:

The current compensation arrangement is askew, so that even if the company performs below its competitors, management and directors will stand to gain.

The current compensation arrangement, if applied retroactively to prior Steak ‘n Shake management, would increase the very rewards Mr. Biglari claimed were already excessive in light of their poor performance.

We suspect Mr. Biglari’s thinking towards compensation has changed now that he’s in charge. How else could he desire a pay package that violates his own, purported, tenets?

To be perfectly clear, the currently proposed package, without modification, destroys shareholder value.*

We think we can all agree that paying for performance is both necessary and desirable. We believe the current framework the board has put in place can, if modified, work to the benefit of both management and shareholders.

Luckily, Mr. Biglari has already provided a better template for the board to consider that employs both invested capital and a higher hurdle rate.

As Chairman and CEO of Western Sizzlin Corporation, Mr. Biglari designed the following performance bonus structure for Robert Moore, CEO of Western Sizzlin Franchise Corporation:

Such bonus shall be equal to twenty percent (20%) of Cash Flows in excess of $ 2.3 million annually as adjusted by a charge of 20% of any incremental reinvestment of capital during each year (“Bonus Compensation”).

We welcome the opportunity to help the board determine a more equitable compensation arrangement before the next shareholder meeting. We would appreciate a response at your earliest convenience.

Sincerely yours,

NFI


Sources:
http://www.sec.gov/Archives/edgar/data/93859/000009385910000008/form10q_1q2010.htm
http://www.sec.gov/Archives/edgar/data/930686/000110465909030087/a09-11139_1ex10d1d4.htm
* The language was modified from the original letter in an effort to be suitable for a wider audience.


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