Column: Two law professors experimented with acting like real-life corporate raiders — it didn’t go well

Tejon Ranch Co. is one of California’s oldest — one might almost say “antique” — corporations. What has become a landholding of 270,000 acres, situated in the largely-undeveloped territory between Los Angeles and Bakersfield, was first assembled in 1855, the company was incorporated in 1936 and it went public in 1973.

Frank Partnoy and Steven Davidoff Solomon teach about shareholder activism as law professors — Partnoy at the University of San Diego, Solomon at UC Berkeley. They thought Tejon Ranch would be an ideal subject for a real-life experiment: What would happen if they bought up Tejon stock themselves, then tried to jawbone its executives into taking steps to improve shareholder value, as though they were the kind of activist corporate raiders who make managements of big companies quake with fear?

Here’s a spoiler: It didn’t go well.

Tejon management made a show of listening to their proposals, then essentially blew them off. Having risked a significant share of their retirement nest eggs by assembling a combined stake of about $500,000, they escaped after about a year and a half with a modest gain of $55,000. But Tejon hasn’t really changed.

“There are thousands of companies that have never had an activist investor darken their door,” Partnoy told me. “One of the reasons is that it’s really hard. We wanted to see if we could succeed. But even with our knowledge and our connections and our expertise, we did not succeed in any meaningful way.”

What they did get out of it was a great yarn, rife with insights into the resistance of corporate managements and boards to outsiders trying to shake them out of strategic stupor. They laid out the lessons in a highly entertaining article in the latest issue of The Atlantic, entitled “Frank and Steven’s Excellent Corporate-Raiding Adventure.”

Remarks Nell Minow, a veteran shareholder activist with a sideline reviewing films as the “Movie Mom,” their story is “like a Frank Capra movie.” Think of it as “Mr. Smith Goes to Wall Street.”

Tejon wouldn’t comment directly on their article. “It’s our policy not to comment on specific conversations we’ve had with shareholders,” investor relations executive Barry Zoeller said by email — a bit strange, since these shareholders had disclosed those conversations in a national publication.

Neither professor came to this quest as a “Mr. Smith” novice. Solomon spent a decade in practice as a corporate attorney and writes a weekly column on corporate issue for the New York Times, and Partnoy worked in Morgan Stanley’s derivatives shop during the 1990s and has written several books about financial corruption.

As they describe in the article, they decided one day in 2014: “Let’s get out of the ivory tower and try actually being activists. How hard can it be?”

They settled on Tejon Ranch as a target because it seemed to be a poorly managed collection of potentially lucrative assets. “It’s a mishmash of businesses that never generated that much cash or income — some farming, some mineral rights, some acreage for hunting,” Partnoy says. “It looks like one of those 1960s conglomerates that were busted up by corporate raiders.”

The professors fashioned themselves as less-capitalized cousins of such celebrated investment raiders as Bill Ackman or Carl Icahn, but they also chose to make a quiet, more collaborative approach to Tejon Ranch than raiders who make public demands for board seats and threaten proxy fights to eject underperforming managements. (As holders of about one-tenth of 1% of Tejon’s shares, their options were limited.)

But they may have been too nice. Minow says they should have reached out quietly to institutional investors to gauge their support for change at Tejon.

A public challenge can shake the most hidebound managements, as Minow learned in 1992 when she and her fellow shareholder activist Robert A.G. Monks placed a famous ad in the Wall Street Journal labeling the Sears directors “non-performing assets.” The company soon restructured the sleepy board and shed nonretail businesses that were dragging down performance. Companies have been getting more responsive to shareholders, Minow adds, as campaigns devoted to forcing industry to shake up lazy managements or face up to climate change become better organized.

Tejon Ranch talks today as though the keys to its future are three residential/commercial developments it’s planning for its big exurban property. But it’s been talking more or less the same way for the better part of a quarter-century. “Tejon Ranch in No Hurry to Develop Land,” The Times reported in a headline — in 1991. (No kidding.)

Tejon’s crown jewels today are an outlet mall that opened in 2014 and other retail businesses situated at the base of the Grapevine, a pass on Route 5 carrying traffic between Los Angeles and Bakersfield. Other than that, the company has relied on income from ranching, farming almonds and pistachios, and oil and gas leases. Tejon Ranch recorded net income of $558,000 on revenue of $47.2 million, citing declines in farm commodity and oil prices for a slide in net income from its profit of $2.95 million the year before.

Partnoy and Solomon believed that Tejon Ranch’s market capitalization of about $500 million undervalued its real estate holdings by half. To unlock that value, they needed “a more aggressive timetable for development” or at least better disclosure for investors about what that timetable was. In May 2015, after they assembled their stake, they wrote to CEO Gregory S. Bielli, identifying themselves as “significant shareholders” and asking for a meeting. To their surprise, the company promptly invited them up to its Lebec headquarters.

As they were to discover, in some ways Tejon Ranch is miscast as the target of a shareholder campaign. Its business model, which might be best described as long-term somnolence, doesn’t seem to disturb its biggest shareholders. The four largest are investment partnerships that control nearly 40% of the company, two of whom have seats on the board; Vanguard, the index mutual fund firm, ranks fifth with 5.37%.

None of them seems to be particularly anxious for change at the top, even though the shares have fallen by about 30% since Bielli became CEO in December 2013. Nor do they seem exercised about management pay: Bielli and his top four lieutenants’ cash compensation of more than $2.8 million in 2015 consumed almost all the company’s profit that year, and their cash pay of $2.8 million in 2016 came to about five times the company’s profit that year. Those figures don’t include stock-based compensation, which fattens up the totals considerably.

Indeed, Daniel Tisch, 66, a board member whose family investment fund is Tejon’s biggest investor, told Partnoy and Solomon that he expected his grandchildren to see the fruits of the investment. That might sound like a refreshing departure from the short-termism that’s often said to be the bane of corporate culture today, but Tisch seems to be taking long-termism to an extreme.

In any event, soon after a first cordial meeting at which Bielli agreed with all of Partnoy’s and Solomon’s points — and assurances that Tejon was reexamining its disclosure policies — the professors sensed they were out in the cold. A follow-up query six months later, when their investment was $100,000 in the red, yielded a bland, lawyerly response seeming to backtrack from Bielli’s words. Their proposal last November that the company go private received the cold shoulder from the CEO, who told them that public companies face much less pressure for short-term results than private companies — exactly the opposite of the conventional wisdom.

“That’s the first time I’ve heard that argument made by someone who wasn’t laughing,” Partnoy says.

Tejon is still opaque about the timeline for its residential developments, which are moving in fits and starts through state and county planning processes, with not a spade of earth turned on any of the three. “Given the fact that so many steps in the development process are controlled by others,” Zoeller says, “it is difficult for us to provide shareholders and the public-at-large with a specific timeline for ultimate development.” The company’s annual report says the time from groundbreaking to completion can be 25 years or more.

The professors feel they did accomplish something in their Tejon Ranch adventure. “We like to think we made the managers feel they were under some pressure,” Partnoy says.

The rise of index-fund investing has made shareholders too passive and managements too complacent, Partnoy concludes. “There’s a real need for the little investor to yell and scream and try to influence managers. Activism is a real thing now. The people who are angry or spend their energy reading and commenting on the web could spend some time fruitfully targeting a company. You might not be that successful as one person, but if a lot of people do this, it can make a significant difference.”

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