Although the number of companies targeted by dissident executives and directors is down this year when compared to record levels last year, according to data compiled by Activist Insight Online, there has been no shortage of notable campaigns.
As of June 26, 21 companies globally were targeted by former or current top employees, such as chief executives and chairmen. This number is less than half of last year’s 58, although it is just shy of 25 in the whole of 2016.
Some of this year’s most topical campaigns occurred on a global scale, with not just former executives seeking a comeback. British retailer Superdry lost a battle with its founders this year after former boss Julian Dunkerton requisitioned a meeting to force his return to the company’s board.
Dunkerton joined forces with co-founder James Holder, with whom he owns a collective 29% stake in the firm, and blamed management for the company’s poor results. The former executive argued that heavy discounting and poor product decisions had been responsible for a 1.2-billion-pound value destruction that the firm’s shareholders had experienced over the previous 12 months.
Olshan Frome Wolosky partner Elizabeth Gonzalez-Sussman told Activist Insight Online that a large stake in a company is a main reason for the return of an executive or founding member. “They usually maintain a sizeable stake in the company and with that they maintain an economic interest that is significant,” explained Gonzalez-Sussman. “If after they leave they’re seeing a dramatic decline in performance, they come back, take a hard look, and think the company performed better when they ran it.”
Although Gonzalez-Sussman believes the returning executives are usually well-equipped with a detailed platform based on years of inside knowledge of the company, Schulte Roth & Zabel partner Aneliya Crawford outlined to Activist Insight Online that a former executive faces very tough odds in a campaign to return to a company.
Despite the difficulty a former executive faces to return, nearly all of the companies that faced demands made by current and former directors and CEOs were board-related, with 20 of the 21 targeted companies confronted with the issue.
Crawford noted that these types of contests are often personal and are a matter of legacy for the ousted person “so it’s clinched with the undertones of the relationship the person has with the business and the relationship with people in the boardroom.” She explained that it is difficult to run a campaign that is subjective when hard facts are fed to shareholders about the circumstances under which the executive left the company. “There is a presumption that it’s just a personal battle to come back to a company that doesn’t want you,” she noted.
Crawford also said that if there is a problem with the company, shareholders want change so it is a lot easier to vote in new management than a former CEO or founder. Indeed, Dunkerton faced these problems at Superdry and was held partially responsible for the fashion retailer’s recent troubles by management. The founder was able to draw the support of fellow shareholders, including institutional investors Schroders, Investec Asset Management, and Aberdeen Standard Investments, however, and gained 50.7% shareholder support for his return campaign.
It was a different story for former MiMedx boss Pete Petit, however, when shareholders denied his return to the company’s board last month. MiMedx nominees, Todd Newton, Kathleen Wilsey, and CEO Timothy Wright garnered “overwhelming” shareholder support, an “unmistakable statement that it is time to move beyond the Pete Petit era,” the firm commented.
Something that may have worked in Dunkerton’s favor, other than his large stake, was his small nomination slate. Due to the difficulty of these campaigns, Crawford sees CEOs take a “sober view of what they can achieve” and sometimes either only try to take a minority of the board or ensure that the internal directors they believe are taking the company in the wrong way are broken up, even if the former executive is not given a place in the boardroom.
Despite the negative predictions a former executive may face, Japanese housing equipment specialist Lixil Group’s ex-CEO Kinya Seto was not shy in launching an eight-strong slate, including himself, in a fight for control of the firm’s board. Seto resigned in October but several foreign investors, including Marathon Asset Management and Indus Capital, believed the move was far from voluntary, and that the process that led to the decision was not subjected to adequate scrutiny.
The group of foreign investors targeted chairman and founding family member Yoichiro Ushioda and Chief Operating Officer Hirokazu Yamanashi, leading them to resign and paving the way for Seto to rebuild his reputation among shareholders. He promoted a case for wholesale board changes at the construction company and was reinstated in June. Following a shareholder vote, Lixil had 14 directors, with Seto’s slate effectively having control over 57% of the board.
Toby Rice was named CEO of EQT this month after his seven-member slate was elected with more than 80% of the votes cast at the shareholder meeting. Toby co-founded Rice Energy with his brother, Derek, which was sold to EQT two years ago. After expressing disappointment with management’s performance in December 2018, the brothers, who collectively owned 2.7% of EQT shares at the time, announced a plan to take over the board.
After a months-long battle, the brothers emerged victorious, having secured support from institutional investors T. Rowe Price Associates, D.E. Shaw, and activist investor Elliott Management, among others. Toby has now been tasked with implementing a 100-day strategy focused on organization, technology, and operations that aims to generate an incremental $500 million of free cash flow per year. The Rice brothers aim to improve profitability by widely adopting more efficient technology to improve drilling efficiency.
Case for change
Gonzalez-Sussman believes that whether a former executive is successful or not “depends on if they have the right strategic plan, economic stake maintained, and economic risk.” In a situation where the CEO was ousted and there is bad blood, Gonzalez-Sussman explained that the former executive will probably be looking at a control fight because they won’t have been aligned with board members to begin with.
“Founders have these very detailed platforms because they used to operate the business so they can make a very compelling case for other shareholders to align with and if they have a track record of success they can come back and be very successful,” she explained. “Situations that are not successful are when the executive is unable to convince other shareholders they’re going to be drivers of a successful plan. It comes down to track record and a compelling case for change.”