I took a break from earnings to check in and see what was going on with the proxy fight between HomeStreet (Nasdaq:HMST) and Roaring Blue Lion. Unfortunately, for all you fans of this type of thing, the answer is not a lot.
Having, quite frankly, whiffed in their attempts to put forward two candidates for election for director, Roaring Blue Lion is now soliciting proxies against HomeStreet’s slate of directors.
I don’t really have a dog in this fight. I think the best thing for HomeStreet stockholders would be for the company to pursue a sale, maybe with Banner (Nasdaq:BANR), who clearly needs to do some type of deal to get well north of the $10 billion in assets threshold and rationalize their capital and expense base. For some reason, however, Roaring Blue Lion is not raising this topic, despite the fact that it would most likely garner the exact type of attention and excitement from stockholders that their current efforts sorely lack.
Anyway, I have three general thoughts (or buckets of thoughts) on the current situation.
First, why wouldn’t HomeStreet just give Roaring Blue Lion a board seat? I started thinking about this a while back. Based on HomeStreet’s proxy statement, Roaring Blue Lion is one of their biggest stockholders, with close to 6% of the shares. I am sure that HomeStreet probably considers Roaring Blue Lion to be a nuisance, but to give them a board seat doesn’t seem like a massive concession. For a company that is struggling with some pretty serious business challenges, it would also seem to make sense to try to (or at least appear to try to) work with large stockholders.
Right now, HomeStreet has nine directors. If they added two other directors, giving Chuck Griege, Roaring Blue Lion’s main guy, a board seat and adding another independent director, that would make Mr. Griege one director out of eleven, plus he would then be an insider and they could have him sign a standstill agreement, all of which would really limit his ability to cause mischief. In addition, they could make sure to schedule board meetings, retreats and the like to make sure that he attended in person. My general view of human nature is that people are pretty social beings and it is pretty hard to consistently be a nuisance with a group of people once personal bonds are established, particularly if they are a more or less collegial group.
Unfortunately, however, after reading the chronology of events in Roaring Blue Lion’s proxy materials, the only sensible conclusion is that HomeStreet considers Roaring Blue Lion not only a massive nuisance, but an irredeemable one at that. Obviously, those types of considerations should not impact corporate governance issues, but, it is what it is.
Second, speaking of corporate governance, as a tactical matter, Roaring Blue Lion should put much more emphasis on HomeStreet’s corporate governance shortcomings. Personally, I am much more concerned with how a company is managed than how it is governed, but there is some pretty low hanging fruit that Roaring Blue Lion could go after, like a classified board, no director resignation policy, no separation of Chairman and CEO role and no proxy access. In addition, it looks like the stock ownership by HomeStreet officers and directors is a little light and there are no guidelines (at least that I could find) for minimum stock ownership by senior executives. This last point is something I actually do care about. When executives do not have a meaningful amount of “skin in the game,” it is pretty easy to come to the conclusion that job preservation, not increasing stockholder value is the prime motivator.
Like I said, I think good management is more important than good governance, but (metaphor stacking alert) if someone had an axe to grind, it would all be grist for the mill. Roaring Blue Lion does mention some of these points, but given the attention that many institutional investors give to corporate governance issues, I would be pounding the table on this point if I wanted support for a proxy solicitation.
Third, just what is the point of all this? If I read Roaring Blue Lion’s proxy materials, it seems like they are upset about a $500,000 SEC fine and the events that gave rise to that fine and want the three HomeStreet directors up for election to be “accountable” for that, as well as the how HomeStreet’s stock has underperformed over the past five years. Sure—I would like directors to be accountable for poor stock price performance and the fine is not great—but, if you are going to go the effort of a proxy solicitation, it feels like it should be a “go big or go home” type of effort.
Roaring Blue Lion does raise a few specific things that new directors (presumably that would be appointed if the directors up for re-election are not so elected), all of which seem pretty reasonable. Per Roaring Blue Lion:
“We believe there also may be opportunities for HomeStreet to create more value for shareholders. New Board members could assist in the evaluation of these alternatives, which include (1) monetizing the single family mortgage serving rights and using the proceeds to repurchase stock; (2) restructuring the mortgage origination business by reducing loan originations and targeting an improved efficiency ratio; (3) restructuring the commercial banking business by reducing expenses; (4) realigning executive compensation programs to de-emphasize production volume and focus on profitability; and (5) instituting better corporate governance, including eliminating the staggered Board and separating the Chairman and CEO roles.”
Reasonable? Sure, why not? All these points are probably worth consideration, but I don’t know that I would consider them to be “going big.” Referring to Roaring Blue Lion’s alternatives by number, I guess (1) could result in near term stockholder value, though I would need to understand the numbers involved to figure out how much I cared. I am pretty sure HomeStreet is already working on (2) and (3). With respect to (4), quite frankly, my reaction is “whatever”—I would rather focus on making sure that management had enough stock so that they thought like owners, rather than employees. On (5), I would prefer a non-staggered board, but don’t really care about the separation of Chairman and CEO—at the end of the day, each director has one vote, so what does it really matter?
What is lacking from all of this is the type of thing that I really do care about—a clear path to increasing stockholder value within a reasonable timeframe and with minimal execution risk. Given HomeStreet’s mortgage dependent business model and the difficulties in changing that model, I think that path points in the direction of partnering with someone. Ideally, HomeStreet would find a partner where the mortgage business is a small enough part of the combined business so that the earnings from that business get a “bank”, not “mortgage” multiple and where there are significant opportunities for cost savings and economies of scale. That, to me, is worth a proxy fight.