Ground Continues to Shift for Directors


ron johnsonGround Continues to Shift for Directors ,”Penney backfires on Ackman,” crowed the Wall Street Journal. The April 10, 2013 headline suggested that the brash activist investor got his comeuppance both in reputation damage and financial losses when Ron Johnson, his hand-picked savior for the retail company was sacked and the board re-installed former CEO Myron “Mike” Ullman as CEO, the man Ackman helped to oust.

But there are some important nuances that directors should note.

Activist investors can no longer be dismissed as malcontents or profiteers. In fact they’ve recently garnered the label  “asset class.”

“Activist investors have won more respect as their research has improved and their campaigns succeeded,” said an investment officer for the California State Teachers Retirement System (CalSTRS.) In addition, once-passive institutional investors like CalSTRS are teaming up with activists in proxy battles.  Notable this proxy season is CalSTRS joining Relational Investors’ Ralph Whitworth to press Timken to divest its bearings and steel business to remove the “conglomerate discount that has persistently impaired Timken’s investment value for shareholders.”

Relational cites Timken’s history of poor corporate governance – notably the board’s refusal to declassify board seats following a majority-supported shareholder resolution in 2008, a “D” rating on pay-for-performance and recommended withholding votes on three of the four Director nominees by Glass Lewis characterized as insiders and family members. Both sides have filed additional documents in the runup to the May 7 annual meeting.

Ackman’s Pershing Square Capital Management LP  has incurred significant losses on its 18 percent ownership of J.C. Penney. However, the other directors are not off the hook.  Clearly, Ackman was convinced that Johnson could revitalize Penney’s fortunes, after all, at Apple he drove store sales to the highest per square foot in the industry.  Ackman convinced an independent board of directors of the logic of his strategy. Ackman was no doubt persuasive in gaining support from the J.C. Penney board of directors composed of five retired chairmen  and presidents (Radio Shack, Colgate-Palmolive, Texas Instruments, Southwest Airlines and Oxygen Media), a real estate executive, a university president and a marketing executive for Kraft Foods.  Did anyone have department store retail experience?

Johnson himself was convinced he could deliver. And yet Johnson left Penney’s with little to show for his 17-months of service because he agreed to be paid predominantly in stock and eschewed any rights to exit pay if he were fired. Additionally,  Johnson purchased warrants clearly indicating he was a pay-for-performance leader.  Compare that to Leo Apotheker who left the Hewlett-Packard Company with a $12 million package after his 11-month tenure left the company in shambles.

What investors may observe from the JC Penney saga is that activist investors may not be right 100 percent of the time.  However, they, like the shareholders, have skin in the game.  Johnson appeared to be a strategic choice for the CEO role when he was named.  What had the board done?  Did they just go along with Ackman? Unfortunately, it does not appear that the board did any succession planning during Johnson’s reign.  They gave the former CEO his old job back.

The ground is shifting, directors.  Investors and the media are scrutinizing your background and expertise.  Do you have the industry knowledge to understand and provide oversight of management’s strategy?  Do you devote sufficient time to understand the challenges that the enterprise faces?  Do you request additional information if management’s explanations are inadequate? Are you going along to get along? If you are sitting there pretending to understand, you are taking up a valuable spot.

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