Why Did Tom Bloch Split from H&R Block?

It is not a good sign when the co-founder’s son resigns because he doesn’t agree with the business plan of a company. It is even worse when he goes to the local press to vent his frustration. Unfortunately, that is what Tom Bloch did this weekend.

Bloch told the Kansas City Star “My reasons can be summarized as a disagreement over the direction of the company.” He disagreed with the Board over their decision to buyback 2 million shares last year. It turned out he was right. Since then, Block shares are way down. That’s a discrete mistake, and it has already been made, so it seems unlikely that his consternation was only about buybacks. The driving reason had to be his more vague pronouncement on how the Board was putting “long-term shareholder value at risk.”

Block lost approximately 600,000 customers this year. That was a bit of a surprise, because some of their competitors were in crisis. Jackson Hewitt only had RALs at about half of its stores.  Block still doesn’t have an answer for TurboTax and other online filing services. Their Block at Home seems like a good idea. It lets online filers come in to an office for a double check. That is something that Turbo Tax can’t match. Unfortunately, TurboTax is also adopting some of Block’s advantage: TurboTax has a deal with MetaBank to provide refund transfers. That is short of a RAL, but is does satisfy some consumer needs for expediency.

Bloch’s not the only exit from the board. Last week, President and CEO Russ Smyth departed. Other top people have left, too.

What is Tom Bloch referring to when he talks about the short-term vision at Block? It used to be that forsaking “long-term value” was shorthand for critiquing the problems with H&R Blocks’ entry into subprime mortgage lending. Block is almost out of that problem. They aren’t issuing any more mortgages, although they are on the hook for a few that they had to buy back. The new “long-term” problem would appear to go back to the core issue surrounding how Block runs its business. Henry Bloch believed in creating a lasting value proposition. He wanted to keep customers for the entirety of their financial lives, helping them as their taxes grew more complicated but always at a fair price.

There is nothing about the refund anticipation loan product that echoes that philosophy. A RAL is for a customer that is thinking short-term, and while the goal in their horizon is only to get their money more quickly, that customer is probably less focused on quality tax prep at a good price. On message boards, franchisees constantly bemoan that Block doesn’t aim for upscale young singles with two careers, a 529 plan, and a mortgage. Instead, their RAL strategy makes their stores appeal to down-on-their luck folks looking for a quick staunch to a deteriorating financial picture. These aren’t people on the way up. All too often, a RAL consumer is looking for a last-minute plug in the stern of their sinking financial ship.

Block hired a new CEO on July 7th. Turns out that the new boss is going to be an old boss:  Alan Bennett was CEO on an interim basis for parts of 2007 and 2008.  This time around, he will be paid $950,000, plus he’ll get a signing bonus of $900,000 and options for 1 million HRB shares.

There is no word on how this new post will affect Bennett’s existing position on the Board of Directors of Halliburton.

The Hewitt family, which owns Liberty Tax, wants to convene a meeting with Tom Bloch.