Still Keeping An Eye on Trouble in Boardroom

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, June 14, 2007

GREENWICH, Conn. -- In Washington, he is known as the former Securities and Exchange Commission chairman who backed shareholders in corporate boardrooms and pushed for tougher enforcement against Wall Street delinquents.

Now, outside the Beltway spotlight, in a converted farmhouse in this tony town 30 miles from Manhattan, Richard C. Breeden is reinventing himself as head of an exclusive investment fund bearing his name.

That a former securities watchdog would turn money manager may seem unusual. After all, Breeden Capital Management, which requires a minimum $5 million investment, is frequently referred to as a hedge fund -- a lightly regulated industry criticized for its opacity.

But Breeden's $1 billion fund, which last week marked its first anniversary, is part of a growing pool of investment money set up to agitate executives at companies thought to be undervalued and inefficiently run. These so-called relational investing funds generally acquire substantial stakes in companies and wield their power as shareholders to press for changes in management or corporate strategy, sometimes by gaining seats on boards of directors.

"If your performance is weak, make it strong. If you're balance sheet is weak, make it strong," said Breeden, who has also worked at an accounting firm and has served as outside monitor to such scandal-ridden companies as WorldCom. "I've yet to come across public companies that had problems you couldn't fix."

Applebee's International became Breeden's inaugural target, when he nominated himself and three others late last year to run against management's candidates for the board. A months-long fight ensued, during which the restaurant chain portrayed Breeden as a stubborn activist, and Breeden criticized the company for "bloated expenses" and "unhealthy governance practices."

With a proxy fight looming before its annual shareholders' meeting in May, Applebee's agreed to give Breeden and one of his nominees, Laurence E. Harris, a Washington lawyer, seats on the board and on key committees. The deal with Applebee's restricts Breeden and his fund from engaging in further proxy contests and from putting forth shareholder proposals.

His work with Applebee's may have quieted the skepticism of some in investing and corporate governance who were surprised that Breeden, with virtually no money-management experience, launched a fund, and moreover, was able to raise $1 billion in one year.

"A lot of people were skeptical about his getting into this area. . . . It's legitimate to question what relevance [his background] had to running an activist hedge fund," said Gary Lutin, an investment banker at Lutin & Co. who advises shareholders on corporate control matters.

And while a year is not enough time to judge a fund's success, Lutin said, "so far, Breeden's proven to be much more effective than the general run of screaming activistas."

Breeden said that what he is doing -- "engaging with companies to fix problems" -- is not really new to him.

He was the court-appointed monitor at telecommunications giant WorldCom after its accounting scandal and recommended changes in its corporate governance. He was also tapped by the board of Hollinger International, a newspaper publisher, to investigate corporate abuses. Breeden's report accused former managers, including Conrad Black, now on trial for racketeering and other charges, of running a "corporate kleptocracy."

Even in government, Breeden's activist streak was evident. While he was SEC chairman, from 1989 to 1993, he took positions that led to the demise of investment banking firm Drexel Burnham Lambert stemming from securities fraud and the punishment of Salomon Brothers over bond-trading violations. On the corporate governance front, Breeden's SEC passed rules that required increased disclosure about companies' financial performance and executive pay.

Breeden battled with Treasury Secretary Nicholas F. Brady over increased SEC control of the government bonds market. That effort failed, but several laws were passed during Breeden's tenure that gave the commission more power to combat market fraud.

Breeden's history of working with public companies helped persuade the California Public Employees' Retirement System to become one of the earliest investors in his fund, said Christy Wood, a senior investment officer with Calpers. The country's biggest pension fund invested $400 million last year and intends to commit more money, Wood said.

According to Calpers, Breeden's fund, which aims to outperform the Standard & Poor's 500-stock index by 10 percent over the long term, returned 16.6 percent in its first six months. It beat the broad index by 2.82 percent.

"It's one thing to get the financial analysis to figure out how the company could improve," said Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, another large pension fund that plans to invest in Breeden's fund. "But selling that to management, and more importantly, selling that to the board and getting them to listen to you is truly a very finite skill."

Calpers and Calstrs have increased their investments in activist funds in recent years. Calstrs, for example, made its first such investment two years ago, when it committed $800 million to two funds; it will soon have $2.5 billion of its $170 billion portfolio committed to nine activist funds, Ailman said.

Breeden, 57, has not declared his next battleground. But his fund has accumulated shares in companies including H&R Block, the tax preparer that recently sold its troubled subprime mortgage division, and Bausch & Lomb, an eye-care product maker that last month agreed to a private-equity buyout. The fund also has nearly a 10 percent stake in Acco Brands, an office-supply company.

"2008 will be here before you know it," Breeden said.