By Jack Cumming
Recently, we have seen a spate of interventions by “activist” investors. “Activist” investors are money-focused individuals and firms that think they know how to make established enterprises more profitable. Some are more conscience-driven than others.
Profit Vulture
In senior living, most recently, Peter DeSorcy has been criticizing Brookdale and pushing for more profit, presumably at the expense of those the business serves. DeSorcy has an interesting partner in H.R.H. Prince Pavlos, who was profiled in the Tatler socialite news outlet (Click here). Tatler was re-founded in 1901, succeeding an earlier journal, The Tatler, founded in 1709, and it has been following royalty ever since.
DeSorcy not only consorts with royalty, but he also likes to write letters to boards of directors, admonishing them that the companies they oversee could be more profitable. That led the Securities and Exchange Commission to admonish him to stop treating opinion as fact (Click here). Now, Brookdale’s Board appears to this observer to be giving the casual mercenary intervention of outsiders greater credibility than they give to the company’s own management.
Southwest Airlines is another example. Elliott Investment Management, an opportunistic money firm, has forced Southwest to change its customer culture by seeking short-term margins at customer expense, e.g., less democratic seating and charging for checked baggage. Elliott portrays itself as “… generating a consistent return to its investors. These elements include an opportunistic trading approach, the creation … of value, effective liquidity management, and managing operational and counterparty risk.”
Southwest long flourished as the people’s airline. It enjoyed a stellar reputation for good management until 2022, when outdated systems and staffing approaches caused a meltdown. It’s not uncommon for innovative businesses like Southwest to flourish during the tenure of the founding leadership but then to flounder under the complacency of the successors.
I don’t know enough to say that’s the case here, but it may be. One thing is for sure: Favoring short-term investor rewards over long-term customer perceptions is not a good strategy for any business. It’s not good for Southwest, and it hasn’t been good for Brookdale.
Not-for-profits
Technically, the not-for-profits don’t have to worry about such predatory vulture investors. In reality, though, the desire of egotistical individuals to intervene is not determined by corporate form. Control and dominance are human qualities that know no restraints other than idealism.
We all know of not-for-profit CEOs who don’t hesitate to leverage a balance sheet to support growth, whether that growth is well-conceived or not. Some people and firms profit from persuading businesses to take on debt or from steering a business through expansion, whether that is warranted or not. Leveraging CCRC balance sheets weakens resident financial security.
Responsible Stewardship
Not all for-profit enterprises are driven by greed, despite the representations often found in the popular press and other media. Continuing Life LLC., in California, and ERA Living in the State of Washington, for instance, provide an assurance to residents that not-for-profits would do well to emulate if they are truly mission-driven.
The refundable portion of the entrance fees for these family-owned businesses is structured as a first deed of trust (a mortgage) claim on the community’s assets. If the community fails financially, the residents can take ownership and continue in residence. I know of no not-for-profit that provides such a safeguard.
Moreover, the investors in for-profit institutions provide the at-risk equity capital, further sheltering residents from financial failures. Most recent senior living financial failures have been not-for-profits. Residents and prospective residents are well-advised to be aware of the risk inherent in not-for-profit communities. With investor funding, the equity investors take the hit before residents are impacted. There is no investor cushion in not-for-profit senior living. The residents are the risk takers.
The Overlooked Success Story
Then, there’s Life Care Services LLC (LCS™), which started as a not-for-profit but became a partnership. It is now a leading force for good management under the leadership of CEO Chris Bird. LCS™ offers competitive management services and operates a portfolio of senior living properties. It is well respected by both residents and its industry peers.
LCS™ is not perfect, but it’s learning and striving. Not only Brookdale, but also many bloated industry operators, could learn much from LCS™. One way to cut high overhead costs is to replace overstaffed central offices with an LCS™ management contract. LCS™ management capabilities also offer the potential for soundly managed, resident-governed senior housing. Keep an eye on LCS™.
Back to Brookdale
Brookdale is well-positioned to upend how Americans live, beginning with its expertise in communal living for older people. Since population is increasing, agriculture is becoming increasingly industrialized, and the cost of lots for single-family housing is through the roof, it is quite possible, perhaps even likely, that more and more Americans will choose communal living.
Is it even true that shareholders benefit more from sales of properties in Brookdale’s portfolio of communities than from addressing the housing opportunity? I suppose it’s possible. I know some day traders who claim that they can outsmart the buy-and-hold investors. Still, my own experience is that building transformative businesses is a better path to social purpose than Milton Friedman’s notion that “The Social Responsibility of Business Is to Increase Its Profits.”
Personally, I’d rather invest in something constructive than benefit from the activism of vultures to gnaw on the hulk of a business built by others. By way of disclosure, I bought Brookdale at $37, and it now trades at about $7, so if the price rebounds to over $37, I stand to gain.
