Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here? "Incentives are too powerful a control over human cognition or human behavior."
The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc. It feels very similar to discussion on the BAM board. If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned. The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares. One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those. The priority hasn't changed and I don't think it will.
Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice.
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners. That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest. That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents.
This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa. What is FFH paying Ben's firm to manage that $50m? Is it 200 bps per year? More? Less? Nobody on the outside knows. But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k. Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.
Is it the same type of situation with TS? As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations. Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars. But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends? Who really knows at this point. I would hope that Prem provides an explanation at the next quarterly call.
The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions. The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars. We like to believe that all of these donations are made with the most altruistic and best intentions. But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.
SJ
