Not So Fast, Lord Black

Investor Chris Browne's persistence put a spotlight on the Hollinger CEO

On Aug. 30, Christopher H. Browne finally got an answer to the question he had been asking for three years. In a 513-page report, a special board committee of Chicago-based newspaper publisher Hollinger International Inc. (HLR ) explained how much the company's longtime CEO and still-controlling shareholder, Conrad Black, and other managers had been paid over the previous years, and what role the board had played in the payments. According to the report, Black and a few others had transferred to themselves from 1997 to 2003 more than $400 million -- 95% of the company's entire net income -- in what board investigators coined a "corporate kleptocracy." Black was fired as chairman in January. Now he and the board are embroiled in a court fight over repayment of that money and the company's future that could last for years. Black's company, Ravelston, maintains he and the other managers did nothing wrong and that the report contains numerous inaccuracies and misrepresentations.

Browne is an unlikely figure to have set in motion such a management implosion. A managing director of Hollinger's largest shareholder, New York investment firm Tweedy, Browne Co., he is one of five men running a well-regarded but modest investment firm. They manage $10 billion in mutual funds and private investment accounts and invest in companies they believe are undervalued by the public markets. But they don't seek to gain control of, or even help manage, distressed companies, as other value investors often do. Their Hollinger stake represents less than 2% of their total assets, and though they owned 18% of the publisher's class A shares, it was Black and his partners who controlled the company through their supervoting stake. Browne never even sought a seat on the board. Says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware: "Until this whole thing happened, I was just not familiar with Tweedy Browne."

Browne and his partners didn't go after Hollinger because they wanted to grab the limelight. "We just asked a question," says Browne. "That's all we did." And he kept asking, first in an October, 2001, letter to the independent members of the board. That's the year Browne and his partners noticed that management fees being paid to Ravelston -- a firm owned by Black and Hollinger's former COO, F. David Radler -- had gone from $8.5 million in 1996 to $40 million in 1999, and were still running well above $30 million a year despite a slump in the business. On top of that, Hollinger had sold off some regional newspapers, and, Browne later found out, Black and other executives were paid tens of millions more in noncompete fees by the buyers. Browne, who felt those should have gone to Hollinger, questioned the payments at Hollinger's May, 2002, annual meeting in New York, which not a single outside board member attended.

A year later, Browne filed a report with the Securities & Exchange Commission demanding the board look into the suspicious compensation. By Hollinger's 2003 annual meeting, shareholders had been whipped into a furor. Black blasted Browne, depicting his auditors as harassers. And the embattled CEO told questioning investors: "You don't know what you're talking about, but you're still welcome as shareholders." Browne was undeterred, and Hollinger investors are in his debt. "I think Tweedy Browne's role in Hollinger was intelligent shareholder activism at its very best," says Leon G. Cooperman, founder of Omega Advisors Inc., also a shareholder in Hollinger.

Browne's step to center stage was not merely a refusal to be cowed. It was also a reaction to a markedly changed corporate-governance environment -- one in which shareholders, in the wake of Enron, WorldCom, and Tyco International (TYC ), have become more powerful and boards more pressured to pay close attention to such excesses as stratospheric executive pay. Browne figured he had nothing to lose by pressuring Hollinger's star-studded board, which included Henry A. Kissinger, 9-11 Commission member and former Illinois Governor James R. Thompson Jr., and foreign-policy expert Richard N. Perle. These were people with reputations to protect, after all.

Browne is quick to dispel accusations by Black's supporters that Tweedy Browne intended to spur Hollinger's breakup from the start. The firm -- in which Chris's father, Howard, became a partner in 1945 -- likes to invest in profitable companies trading at no more than two-thirds of their intrinsic value. They began looking at Hollinger in 1999. Hollinger was trading at $11 a share even though its assets should have been worth $18 to $19 a share based on the prices paid in recent newspaper acquisitions. What's more, Tweedy Browne had made money in a previous company run by Black, so the partners didn't hesitate to buy into Hollinger. It wasn't until early 2003 that they started to worry that Black was benefiting at their expense.


Included in the report that spelled out Hollinger's missteps was a raft of revelations about Black's personal excesses, such as the $24,950 he spent on "summer drinks" at his cottage in Cottesmore, England. Browne didn't object to Black's high-priced lifestyle, just the fact that he and other shareholders were bankrolling it. "I'm not critical of how people want to live as long as they're spending their own money," he says.

That's understandable -- Browne himself lives quite well. Aside from his Park Avenue apartment, with its sweeping views of the city, he has owned a series of homes in the exclusive beachside town of East Hampton, N.Y. Although Browne, 57, grew up the son of a Wall Street broker, he was not groomed to follow his father's footsteps into finance. "My father almost never talked about work," he says. Browne fell into Dad's business by accident. He had just finished a six-month stint in the Army Reserve in 1969 when he arrived at his father's office to borrow train fare home to New Jersey. His father's partner, Thomas P. Knapp, a friend of Warren E. Buffett's, gave him a two-hour lecture on value investing and invited him to work there for the summer.

Browne was hooked. He spent his early years at the firm buying up banks in Illinois and waiting for the payoff that came through consolidation. As an associate in the 1970s, he pushed to start the money-management business that eventually became the firm's bread and butter. Browne's father died in 1994, but his brother, William, is also a managing partner. Along with three other managing partners, John D. Spears, Thomas H. Shrager, Robert Q. Wycoff Jr., and other staff, they have $488 million of their own money in the firm.

It's unclear how long Tweedy Browne will keep its Hollinger stock. By challenging Black's rule, Browne helped boost the shares from a low of $7.70 in March, 2003, to more than $20 a share in April. They've slid a bit, to a recent $17, but the firm is still up at least $77 million on its investment. Not a home run, Browne says, but a vast improvement over the mess that existed before he started asking questions. It just shows that sometimes it pays to speak up.

By Nanette Byrnes in New York

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