In fact, as the author of the book mentioned in the article notes, the fact is that “maximizing shareholder value” can mean a lot of different things to a lot of different people, and many of them are not aligned with the interests of long-term, risk-averse investors. That means the term can be used to justify all sorts of funny accounting and managerial games.

We wouldn’t go so far as the author does and claim it is the root of all shareholder-unfriendly moves, as well the possible future bane of capitalism, but it’s one more useful reminder to dig deep to really discover executives’, directors’ and controlling shareholders’ motivations.

What would seem like a semantics discussion is a fundamental difference between types of investors.

Remember: “Culture eats Strategy for breakfast”.

The 13-minute “60 Minutes” segment on Howard Buffett (Hint to CBS – don’t have more than one ad per online video, it is absolutely irritating):

60 Minutes “Overtime”: Growing up Buffett

60 Minutes: Why Howard?

Video: Breakout Blog’s 4-minute discussion of Howard Buffett.

From the “interesting but not to the point” series, Howard has some interesting things to say about plowing:

Berkshire’s isn’t the only board he’s in: count Coca-Cola Enterprises (the bottler) ConAgra and Archer Daniels Midland as very important companies he’s been in the boards of. He is an accomplished philanthropist as well.

Just a reminder: Buysiders.com is all about sharing useful investing building blocks and mental models with a community of people interested in these subjects, and this post is highlighted exclusively for overall capital allocation policies that might be applied to other investments. We don’t advise on specific stocks nor do we make any recommendations, as well as we may or may not hold Apple at any given time and so on.

A quick summary of Jon Corzine’s handle of MF Global, posted yesterday in the NYT’s Dealbook column, also shows some impressive similarities.

Change a few words and some of the 10 points can be used to consider share buybacks as well.

The NYT article, in fact, doesn’t represent our view of the problem, since it mainly reflects the writer’s political opinion that a company shouldn’t be laying off so many employees if it has so much cash in the bank to do sizable share buybacks. That misses the point by a long shot.

There are two big points here. One is whether over-cautious companies are passing real opportunities to invest and hire at at time of supposedly cheap opportunities to do so. To put it another way: if companies were well managed (or got lucky, it doesn’t matter) enough to put away some cash and now see their less-efficient or troubled competitors suffer as well, isn’t this the time to invest and pull even more ahead when the cycle reverts?

The other point is: Inverting the reasoning above, let’s assume that the situation is so complicated that caution is indeed warranted. Shouldn’t keeping the cash as reserves be the real choice in this case?

Share buybacks are great when the shares are undervalued and there’s both clear visibility and a lack of better options – but we’re with Buffett in that they are just one of the many options for the shrewd capital allocator. It implies a level of visibility of long-term prospects and, well, sapience from management that’s seldom seen: management has to know that its company’s stock is cheap. As our 23-year experience picking stocks has shown, that kind of “certainty” (let’s call it asymmetrically favorable probability distributions) is hard to come by.

The real problem in this case is whether misaligned incentives/ conflicts of interest and the institutional imperative aren’t driving managers to do share buybacks – instead of motivation by sound financial and strategic reasons.

Conflicts of interest: That’s a risk when EPS is a big KPI (key performance indicator) in executives’ compensation plans. While it looks great on paper to drive alignment, there can be many situations in which this metric (if overweighted) can drive irrational or reckless behavior compared to long-term objectives. Cases of management driving repurchases to hit the EPS “sweet spot” for their compensation schemes are not unheard of, and that cash could have been used for investments or as a reserve against risky times.

Institutional Imperative: That’s a risk because share buybacks have an uncontested aura of shareholder-friendliness. To put it another way, CEOs don’t lose jobs for recommending share buybacks and less-inquisitive investors have also come to believe that a buyback program is always a good sign. Ask WorldCom shareholders whether Bernie Ebbers’ buybacks were a good idea – or, more recently, ask Netflix owners… In fact, there are even rough studies claiming that, in aggregate, share buybacks destroy value. Of course “in aggregate” means very little, and it reminds us of the studies that “show” that M&A destroys value. And just as M&A now has a bad fame because it’s been overused and can be poorly thought and carried out depending on the incentives and personalities of the management teams involved, we wouldn’t like share buybacks to be thought of a “bad move” per se. Both can be misused, just as any other tool in managers’ toolkits can.

“Culture eats strategy for breakfast”: if that was MF Global’s risk management culture, not even the world’s most powerful, accurate, on-time risk management systems – programmed and run by the world’s best minds – could save them. Because “he was from Goldman Sachs”, because of the “Goldman halo effect”, bad decisions were overlooked, too much risk was piled on, and a market shakeout took the firm down.

We wrote just days ago, regarding the “key people” aspect of an investment or company (or whatever): “Ultimately, in investments or revolutions, it’s all about the key people (…) – it’s vital to understand their real motivations, aspirations, personalities and incentive/moral systems. Not what they say it is, what it really is.” (we added emphasis for this post). Finding out about a given company’s true culture (which tends to emanate from its key people anyway, at least over time) is just as difficult and time consuming, and as we can see in this example, just as important.

One thing we can say right off the bat is that, having attended both, the Ira Sohn Investment Conference is a better event: shorter in length, better attended and with better speakers, more focused and, we dare say, with more committed speakers.

David Einhorn: Short Green Mountain Coffee Roasters (Nasdaq: GMCR). Both Reuters and Bloomberg‘s stories are accurate enough accounts. That said, they don’t fully capture what appears to be another case of relentless research by Mr. Einhorn. Again, he may be right or wrong, but it’s hard to argue that his team hasn’t worked hard at this. This reminds us of Einhorn’s must-read book Fooling Some of The People All of The Time. And the Einhorn effect remains intact: by the time his talk was over, the stock was dropping 13%.

Jim Chanos: Global Value Traps. He presented the many features of a “value trap”-kind of investment, some of which can occur simultaneously. Then he distilled five value traps he’s focused on and named names. One of them? Brazil’s Vale, one of the world’s largest mining companies. While he’s always fun to watch, we’d prefer one-two main ideas and derive his investment process from them. If it sounds like David Einhorn’s presentations, it’s because we prefer the deep-research presentations.

Vladimir Jelisavcic, Long Acre: DryShips, Inc. (Nasdaq: DRYS) – long the convertible bonds. This was a tough one to watch and a reminder of the need for synthesis/”packaging” skills. A bad presentation detracts from the actual message and influences our perceptions about the speaker. While it’s obviously important to keep this in mind in order to avoid being “charmed” by an outstanding speaker, it’s also important for the speaker to present well and avoid an undeserved bad impression. And lo and behold, by the time Mr. Jelisavcic got to the details it was clear that he had done the work on the convertibles – assuming he’s correct about the difficulty of increasing capacity in the UDW ships/rigs (UDW=ultra deep water).

In the Q&A question, Vladimir discussed his fund’s philosophy/goals: to attain equity-like returns via distressed debt investing. His point is that if the debt is distressed, there’s a high probability that the stock is also distressed, in which case the debt investment gets you “closer to the assets”. That is, you buy something with potential price upside (from the bond price and conversion premium) but with higher seniority. The problem is that it’s always an investment research process that’s heavy in legal advice, consulting and so on.

Timothy E. Hartch, Brown Brothers Harriman: Long Dentsply (Nasdaq: XRAY). Re-reading the notes it’s clear the presentation was heavy in data, but not much conviction to be found here. He started by saying that Dentsply is “the one company” in his portfolio that he’d “invest and leave the money there for 20 years”. He called it the best business he knows. While we know and like the company, there are plenty of other businesses we’d prefer to that one. And this observation – that preferences/weightings/risk appetites/experiences/mental models of Investor A will differ from those of Investor B – ties up very well with the interesting story he told about his first assignment at Brown Brothers Harriman (henceforth BBH for carpal tunnel syndrome-prevention reasons):

Mr. Hartch began as a Corporate Finance analyst, and the first assignment was to help a client sell his media company. After valuing the company and sending the pitch book to four interested strategic buyers (all media companies as well), it was time to hear their bids. Companies 1 and 2 had the same valuation: US$ 10-15mm. Company 3 had US$ 25-30mm. He was still concerned because he told his client it could fetch US$ 40-45mm. Then Company 4 siad it’d buy the company for US$ 90 million… The valuable lesson (and best part of his presentation): “Same company, same data, same day, yet very wide range of values. Valuation in an estimate. Be humble about your own.”

There was also an interesting long case on “micro-cap” Energy Solutions, but still very little meat in our notes.

The last speaker was Alexander Roepers of Atlantic Investment Management. He was very generalist, and we were hoping he would spell out his case for McGraw-Hill Companies, an activist case. So we’ll leave you with his first sentence:

“I’m glad none of my ideas were trashed by either Jim Chanos or David Einhorn!”