This is a letter for the Shareholders of Motorcar Parts of America (MPAA), but I would humbly suggest it is worth reading by any investor, board member of a publicly traded company, or allocator of capital who has a passing interest on how the real world actually works. It would also be a good read for any member of the financial press who has a passing interest in brazen displays of conflict of interest, breakdowns of fiduciary duty, and good old-fashioned stories of chicanery, skullduggery, deception, disingenuousness, and likely worse on display by the Chairman/CEO and Board of a public company. Briefly stated: it is going to be long. It is going to be interesting. And again, I humbly suggest learning is to be had.
We will divide into 5 Parts:
- Direct to all MPAA Shareholders: The TLDR
- Background and Why We Invested
- The Governance Play
- The Lying and Deceit
- Moving Forward
1. TLDR
We have voted NO on the 2024 Proxy on all Board members not nominated in the past 12 months. That means the only Yes votes are for the two new Directors – Jack Liebau and Anil Shrivastava – as well as Doug Trussler, the representative from Bison Capital. We think Bison is mostly aligned with shareholders, although most of their investment is via a PIK’ing security that ranks senior to the common stock – we would note that one should always be wary of a co-investor who has a mandate that includes taking public securities private. But to date, all evidence we have seen indicates that Doug is on our side – he has just been horribly outnumbered. We simply encourage all sentient shareholders to make their own, and to us obvious, choice to utilize a NO vote against the remaining Board members to remedy the dynamics that have enabled 20 years of awfulness…and worse as noted below.
What more do we really need to do to explain this situation than to provide you with this chart of the stock of a public company run by the same CEO for 20 years. This is a company that has been run like a non-profit venture for the benefit of management and customers, on the shareholder tab. Look hard at the last 10 years.
2. Background and Why We Invested
Some basic facts. I am the Founder and Lead Principal of Cove Street Capital, LLC. We are a Los Angeles based institutional investment manager – LP, SMA, mutual fund. You can read all about it at CoveStreetCapital.com. We have followed this company for almost 20 years as the company’s HQ is actually seven miles from my home. We have spreadsheets, we were the largest shareholder in one of their largest competitors a decade ago, we know people here, and we know people who know people here.
This is not going to be one of these 70 page PowerPoints on what they do, so we would refer the reader to https://investors.motorcarparts.com/overview/default.aspx if you want to learn more about that. Make sure you watch the accounting video. Twice.
Until last year, we passed on investing in MPAA for many of the reasons we will wind through below as it clearly checks the value trap boxes:
• cheap stock;
• question mark of a business model;
• terrible capital allocation; and
• same Chairman/CEO and Board talking themselves into the same decision-making morass every year.
But in our latest review of the company, a conceptual point was raised: a 65-year-old Chairman/CEO without equity control over a company is different than the 55-year-old version of the same. The latter is very willing to dig in hard to stay in the seat and compound personal wealth at the shareholder’s expense. The 65-year-old, in theory, is looking at next phases of life and is willing to countenance ways to retire with dignity and a much higher stock price. We heard those whispers.
We have talked to every meaningful shareholder in the past 18 months, and let’s just say our comments here are not novel. Shareholders are pissed off and question strategic direction, management, and board stewardship. No “investor” has ever made a dime in this stock. They are certainly glad we are doing this; why they have remained mostly dead silent is another mystery of institutional investment management and the stupendous ability of the Chairman/CEO to wax optimistically about the future regardless of the broken alley of promises from which he orates.
The math is complex but said simply: the aftermarket remanufacturing auto parts business can be a very steady, good return, cash flowing business if you don’t treat your balance sheet as a piñata for your largest customers. You then look at their capital allocation decisions toward any myriad of ventures, which include making a large bet on the “brake” business (late to the game but within the realm of rationality), wheels, and diagnostics; all of which presently sum to a negative. Make some fresh and intelligent decisions in this area, and what we come up with is a stock that can easily be in the low-teens before anything really good happening.
3. The Governance Play
We set out to introduce a pair of potential new directors to the company three months before the nomination deadline and find out where management and the Board stood. We have done this with other companies – 20 times? – in the past decade with respect to adding Board members, writing executive compensation plans, and improving governance structure. No, you haven’t heard a word in most cases because our goal is achieving the best outcomes for shareholders and making money, not getting in the press, branding ourselves as an “activist” or culling conference invites. We have found that small amounts of people with skin in the game working privately together tends to produce positive outcomes…and people feel better about themselves and the process when it’s done this way.
If we faced complete hostility, we had decisions to make as to how much time and capital we were willing to commit to this investment. To be clear, we look at businesses first and then decide (i) how actively engaged we would like to be and (ii) how effective we could be. The Activism world often has it ass-backwards – “this is something so awful that it can be activisted” – but the dog needs to understand the car it may catch. MPAA is not a jewel.
I am going to be specific with certain names, while also using “the Board” at large, which may be unfair on an NRS medical scale to those who rank at 1 vs. clear 10s of pain. From the outside world, it is sometimes difficult to point your finger at EXACTLY what seems to be behind years of underperformance, and it is fair to say that corporate governance might not be the #1 critical variable in future investment success here. Issues like lousy industry dynamics, fixing a problematic cost structure, having customers abuse your balance sheet, and recovering from a global pandemic may be more important factors. But it is our viewpoint that this Board, and its willfully blind support of management, has enabled this company’s lack of success as a public investment through a continuing series of corporate gaffes, and there are few new investors who are willing to consider buying stock here without change.
I am also going to mention our two Board candidates who were NOT nominated – one is a highly respected industry insider in his 70s and NOT a threatening CEO candidate (“industry candidate”) – and the second is a “corporate candidate” for whom we have a lot of respect and who has previously served at several Boards where we invested successfully. As importantly, he is the type of guy who walks into a potentially hostile Board meeting and has five people asking him for dinner plans by the end.
So we reloaded on the work, math, and industry contacts, and we booked a meeting with Chairman/CEO Selwyn Joffe because roads here run through him. This is a CEO who exercises a dominating level of control over the Board and has no remotely obvious internal successor.
On February 14th, 2024, team CSC met at MPAA HQ with the Chairman/CEO, the CFO, and Investor Relations. It wasn’t our first meeting, but this time was different as we now owned the stock and therefore were entitled to share some opinions. There were some moments, but it generally went well, and we – CSC and MPAA – very clearly agreed on one idea: Board change was vastly overdue. We had two great candidates for MPAA to consider who were for the benefit of all, and we looked forward to a series of exchanges as we went through the process of presenting them to the Board well before the June nomination deadline. We noted, the first of many times, we were beginning a process that was designed NOT to turn into a college exam cram process with lawyers and histrionics at the last minute.
On February 21, 2024, we sent the following letter to the Board summing up the meeting. Yes, say what you are going to do, do what you said you were going to do, and repeat it often.
[See Appendix A – This link will take you to the Appendix page. Keep the Appendix open for reference.]
To the Board of Directors:
I am writing to you as Lead Principal and Portfolio Manager of Cove Street Capital, a Los Angeles-based investment manager which owns approximately 4% of MPAA common shares.
We have followed MPAA actively for almost twenty years and are appreciative of the company’s consolidated industry position, the new growth opportunities in the brake arena, and in our opinion, the undervalued status of the company’s equity.
Clearly the company has had a mixed record over the past decade, due to both external factors, as well as some self-inflicted financial and execution issues. We are hopeful that recent price increases will be sufficient to restore reasonable profitability and working capital sanity in the core remanufacturing business and that the braking initiative is on the cusp of value realization through the signing of material new customer relationships at accretive margins.
Our purpose in writing this letter is to suggest that the company needs to refresh its Board to match a variety of perceived changes in the company’s current outlook. Small cap companies often neglect the importance of taking the lead in governance issues, which have a subtle but important effect on investor perceptions and valuation. Additionally, MPAA has any variety of “interesting” decisions to make in regard to the balance sheet, growth initiatives, and what we would consider to be legacy “question-mark” businesses that collectively are losing money and demanding management time. We think “new blood” with differing perspectives and fresh thinking would be helpful to team MPAA as it navigates the current environment.
Per the Articles of Incorporation of MPAA, we are formally requesting the paperwork from the Nominating and Governance Committee to submit applications for two new Board members. We do not think the Board needs to be expanded, and we think it is proper for the Board to make its own decisions as to who might be willing to step down.
To be clear, our intent is to improve the company and hence its longer term path toward delivering value for shareholders. We firmly believe that the best decisions are privately made by smaller groups of people with skin in the game, and thus, our communication is between Cove Street Capital and the company directly. We note that there is plenty of time to have a thorough and professional process that respects the contributions of current members of the Board, but we think it is important to collectively show progress toward what we think would be common goals of updating and improvement.
We had what we think was a transparent and productive meeting with Selwyn last week, and I think we are highly cognizant of the opportunities and issues facing MPAA. We do not seek to control the company, or frankly have any motive other than to productively make money for shareholders. We do not seek credit and publicity through this process. In fact, the best outcome here is if the company takes the lead on our proposal and claims full public investor relations credit, which is an important part of long term value creation for shareholders.
We look forward to receiving the appropriate paperwork to formally submit our candidates, and to have productive and transparent conversations in regard to this process.
4. The Deceit
In the words of Logan Roy, it started to feel like either (i) we were getting the Heisman or (ii) we actually were in high school and they were not ready to do the work until they absolutely had to. So on April 1st, we sent a letter to Barbara Whitaker, the nominal Chair of the Nomination and Corporate Governance Committee, suggesting the process be taken more seriously.
Our next response from the Company (on April 30th) was still not from the Board but came from Investor Relations.
Following one more nudge from us (on May 1st), this time directed to the General Counsel, we received a response the same day. So one was hopeful a train was finally on a track? Or was this the stall before the stall?
All paperwork for our two suggestions was properly submitted. More silence.
We followed up with another formal letter on May 6th, addressing precise timelines and procedures as laid out in the corporate bylaws to achieve our previously discussed aims in a private and cordial matter.
The following week, we were advised that MPAA’s General Counsel had contacted our two Directors.
On May 21st, we were finally offered a Zoom meeting with the Nomination and Corporate Governance Committee of the Board. Attendees included Ms. Whittaker, David Bryan, Jeffrey Mirvis, and Selwyn Joffe (even though he is a not a member of the Committee of “independent” directors). Things apparently went well, in-line with all conversations to that point, and Ms. Whittaker scheduled a follow-up call with CSC the next day. In this call, Ms. Whittaker told us she had a proposal: would we “drop” the submission of the “industry director” and instead consider the suggestion of “another shareholder” for a director who would be paired with our “corporate candidate.” We said we were happy to work with them, and oddly enough, their suggestion was someone we have known for 30-ish years in Jack Liebau.
We spoke with Jack, were happy to have him aboard, and agreed to the compromise. We would also note that Jack was very clear – he did not come from “another shareholder” as Ms. Whittaker had claimed on the May 21st call. Instead, Mr. Liebau was contacted by a consultant who had been hired by the Board to address their atrocious governance.
So all systems go. We received the below from Ms. Whittaker on May 30th, suggesting all parties were set to move forward with the proposed “corporate candidate.” (The bold indicates our added emphasis)
Jeff –
Thank you for taking the time to speak with me on Tuesday.
I know you spoke to Jeff(Mirvis) yesterday so you are aware of our board discussion, this is just to close the loop and confirm the next steps.
The Board has had a chance to meet and discuss your request to have two new directors added to the Board. We are prepared to move forward, subject to our usual and customary diligence process (including background checks and D&O questionnaires) for new directors. We believe Jack and [corporate candidate] are the right candidates.
Juliet Stone will be reaching out to [corporate candidate] today to provide him with our standard D&O questionnaire and our background check release form. Other members of the Board, including our CEO, would like to meet [corporate candidate] over the next week if possible. (It would be best if [corporate candidate] could come to our facility in Southern California so he could get a tour and some of the directors could meet him in person.)
I will be back to you as we move forward with this process.
So here we were! A theoretically excellent example of shareholders and a board working intelligently and privately together to achieve a jointly desired outcome. The professionalization of a tired Board to assist management in making interesting decisions and making the company more investable with the beginnings of a modern governance structure. Nothing in it for CSC except what is in it for all shareholders – improvement in order to make money.
A member of the MPAA Board conducted reference checks for the “corporate candidate,” including contacting CEOs of two (much larger) companies where the candidate had previously served as a Board member. Both CEOs provided highly positive feedback and strongly recommended appointing said candidate to the Board (as was relayed to us by the MPAA Board member who performed the checks). MPAA flew the candidate out to Los Angeles in early June and met directly with him. Everything appeared to be moving along as expected in a credible process.
And then…silence. Except for a few calls from other shareholders asking why THEY were receiving calls from the company begging them for suggestions for Board members.
In response to our “what’s up?” we received a note from Ms. Whittaker on June 8th suggesting the process had been put on pause to focus on earnings.
We responded by pointing out our extensive efforts to nominate and have approved two candidates before the June 17th nomination deadline. Our suggested path would have allowed the company to press release these new Board members – good IR to show off a self-directed and proactive Board refresh process – and allow the departing Board members to serve until the AGM. Being busy with earnings when you had paid consultants and lawyers to do this for you is not an excuse. On Saturday, June 8th, we laid out next steps for them to take, including an extension of the nomination deadline, if they were committed to taking this process seriously.
On the ensuing Monday (June 10th), the company put out a press release announcing the nomination of Jack Liebau to the Board. ZERO mention of our “corporate candidate,” who up to this point we had been strung along by the Board with their assurances that he would be appointed. Adding to the insult, they continued to mislead in public the origins of Jack Liebau, who came directly from a company paid consultant, and there is unattributed insinuation that Jack was approved by me – “the shareholders.”
5. Moving Forward
So what can we say? If this were a “game” we were playing instead of actually conducting business – we lost. To paraphrase the great corporate strategist, Otter from Animal House: “You f-ed up, you trusted us [to act in the interests of shareholders].” But we weren’t playing an activist Board game. Our plan A was actually an inspired piece of change at the right time. It was just presented to people who apparently are a combination of kindergarten and duplicity guided by crafty lawyering – thank you Latham & Watkins.
We made the call to stand down instead of pushing through our already cleared candidate or rounding up some “usual activist suspects” to run four board seats. This is not a moral crusade, but a calculation of time and money spent for an outcome to be achieved.
The silver lining here – we instigated a process that has led to two new Board members who we believe are of high-quality and who can raise their hands and question what has passed for normal course business.
Unfortunately, the bad news is that they will be vastly outnumbered by other Board members who have confirmed themselves to serve at the pleasure of a failed experiment as a Chairman/CEO – Selwyn Joffe. And we learned about the lack of ethics of the Board of a company in which we have invested.
So, that leaves us here. We are breaking protocol and going public, which I believe is only the second time in 13 years we have been so incensed with the disingenuous behavior by a public company that it seems almost a biblical sense of right and wrong was violated. And if you are asking – because we ask ourselves – automatic selling out of the basis of disgust is often done at the wrong time. We think there is money to be made here if the leash shortens.
A NO vote on each of the legacy board members would impose further (and necessary) tightening. It would send a message that people are watching. And care. As is often the case, most Board members of public companies are genuinely decent people, who somehow gather together and sometimes produce awful or lethargic outcomes. In this case, we leave to your determination whether these are upstanding corporate citizens that can responsibly represent your interests. A majority NO vote on these Directors would cause each of them, to have to submit resignations pursuant to the company’s Corporate Governance Guidelines. The Board would then need to decide whether to thumb their nose at shareholders if they were to reject these resignations. Wouldn’t you like to see what the Board decides to do?
Lastly, as stated in the beginning, we are not fans of public shaming. But in the words of John Stuart Mill, not Edmund Burke:
“Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion. Bad men need nothing more to compass their ends, than that good men should look on and do nothing. He is not a good man who, without a protest, allows wrong to be committed in his name, and with the means which he helps to supply, because he will not trouble himself to use his mind on the subject.”
