Most banks are pretty boring: the products are all the same, the management teams are usually fairly bland, risk taking and innovation are generally discouraged and a pervasive herd mentality seems to dominate. It is an industry that largely marches in lockstep and rewards conservatism. Thankfully, most banks have pretty simple models and, particularly if you can gather a lot of really cheap deposits, boring and conservative can still be pretty profitable. Nevertheless, I like a little excitement every now and then, which why I was pretty excited by the prospects of a proxy fight at HomeStreet (NASDAQ:HMST).
Unfortunately, so far, my reaction has been ¯\_(ツ)_/¯ and I don’t think I am alone. Based on how things have unfolded to date, I don’t think that it will really make any difference to investors who wins because, as a practical matter, I don’t think much will change. I have a few theories as to why this proxy contest seems like such an non-event and some suggestions for each side that could lead to better outcomes for investors.
For starters, something is really wrong with Roaring Blue Lion’s approach (and I don’t mean any procedural deficiencies). Basically, as far as I can tell, Roaring Blue Lion is unhappy because (i) HomeStreet’s stock has been a perennial dog, (ii) due to obvious shortcomings relative to peers in key performance and operating metrics, (iii) caused by issues with their business model and some, according to Roaring Blue Lion, ill-advised M&A. All that makes sense and is hard to dispute.
Where Roaring Blue Lion starts to lose me, however, is that all this has been apparent for some time. I don’t necessarily follow HomeStreet all that carefully, but my sense is that HomeStreet has operated this way since its IPO in 2012. Since Roaring Blue Lion claims that is has been a HomeStreet stockholder since then, I don’t know why any of this is particularly revealing. I also don’t quite understand why Roaring Blue Lion feels particularly compelled to try to do anything about it now.
If I had to guess, I would attribute Roaring Blue Lion’s new found activist zeal to that old standby of “enough is enough.” I get it—I mean if it were me, I might just have sold the stock when I first identified all these issues, but whatever—some times investors need to take drastic steps.
That, however, is my real issue with Roaring Blue Lion’s approach—the steps they are taking are not drastic enough. I don’t know anything about the two directors that Roaring Blue Lion wants to nominate, but they don’t really seem like a huge improvement over the current members of HomeStreet’s board. That is not meant as a knock on HomeStreet’s current directors—they all look suitably independent and accomplished—or Roaring Blue Lion’s potential nominees, but none of them seem like they really have the answer to HomeStreet’s issues.
To the extent that Roaring Blue Lion has issues with HomeStreet’s strategy and the execution of that strategy, those issues are more properly with HomeStreet’s management, not its board. Obviously, selecting, compensating and, when needed, firing a CEO is perhaps the most critical function of a board of directors, but to the extent that Roaring Blue Lion feels that HomeStreet’s board has not adequately exercised its fiduciary duties in this respect, Roaring Blue Lion should base its proxy contest on that, not the need for “fresh perspective.”
Another issue with Roaring Blue Lion’s approach is that, even if it were able to succeed in electing two directors, the tangible benefits to stockholders are likely well in the future and clearly not certain. Changes to business and operating models take time and come with a certain amount of risk. One of the main reasons for, what I feel, is pretty strong investor apathy to this proxy contest is the lack of potential payoff for investors, particularly compared to the obvious alternative, which is to sell. I would expect that there are a number of buyers for whom HomeStreet would be an excellent strategic fit and a well negotiated transaction should provide (relatively) immediate and certain value to HomeStreet stockholders.
Finally, HomeStreet has just out maneuvered Roaring Blue Lion. Even the controversy over the validity of Roaring Blue Lion’s nomination of directors has been masterfully handled by HomeStreet. Regardless of whatever other shortcomings HomeStreet management and directors might have, they sure seem to have great tactical sense.
In terms of advice to each side, I think it is pretty clear that Roaring Blue Lion needs to refine its approach and offer investors more than “fresh perspective”—they should either campaign to replace HomeStreet’s CEO or for a sale (I like the latter)—to garner investor support. As for HomeStreet, they can easily blunt Roaring Blue Lion’s efforts by swapping out a few directors or just appointing a few more if their organizational documents permit. If “fresh perspective” is all that Roaring Blue Lion seeks, I am sure HomeStreet can find a few capable individuals who could colorably provide that fresh perspective.