Steven Davidoff Solomon writes for The New York Times, May 13, 2015
The battle between DuPont and Trian was too close to call before Wednesday, with DuPont winning a contest that lasted far too long. In deal-making, though, “winning” a proxy contest may not be the triumphant victory that one thinks it could be. For future shareholder activist battles, there are lessons in the way DuPont and Trian both won and lost.
NARRATIVE MATTERS The typical hedge fund activist has the advantage of being on the offensive, and thus ahead of the company from Day 1. The activist is typically going after an underperforming company and the company’s management, who may (or may not) understand that this is very serious business. But DuPont is, by many measures, not a broken company where shareholders are unhappy with performance.
Instead, Trian contended that DuPont was not achieving its full potential. This took away Trian’s head start, making it a more uphill battle. Trian was probably best positioned to succeed in such a fight. A “white hat” activist known for solid work and known for trying to work with management, Trian had tried to work with DuPont for a long time before beginning this contest.
But the narrative of a “good company, not broken” was one that the news media grasped. The New York Times Op-Ed columnist Joe Nocera and I were just two who opined on that. It was a point that Trian had a hard time fighting. DuPont capitalized on the narrative with a strong defense that portrayed it as a purposeful company aiming to do the right thing for shareholders.
CLARITY COUNTS The narrative of DuPont as an underperforming company may or may not have been true, but it was also dependent on how you looked at different metrics and how far back you measured performance periods. It was also dependent on how you assess the effectiveness of DuPont’s chief, Ellen J. Kullman, who is more than six years into her tenure.
There was material for Trian to work with. DuPont surely had nonessential assets — like country clubs and hotels. In some quarters, it also failed to meet earnings targets.
But there was no clarity over how badly DuPont was doing given that it was a company in transition helped by an aggressive chief executive who desires change. And so the parties seemed to spend too much time splitting hairs on what time periods to count and which businesses to evaluate, rather than whether the company was actually doing a bad job. It left some shareholders struggling to sort out whether now was the time for a boardroom change, or whether waiting for clarity was a better course.
SHRILLNESS CAN SOMETIMES HURT We are past the days when Daniel Loeb, the head of the hedge fund Third Point, could lob a letter calling the director of a public company a member of the “lucky sperm club.” Instead, we now have a case study in which Sotheby’s lost points for being overly aggressive (and in the end, in which Mr. Loeb won).
Shareholder activism is maturing and the shrill back-and-forth that sometimes occurred in the DuPont contest was out of place, even though it might have been de rigueur 10 years ago. Aggressiveness might be effective in smaller companies with weaker boards, or when management acts entitled. But here, it made both sides look a little desperate and defensive.
SETTLEMENT IS STILL THE NORM DuPont won, but most companies that fight the activists usually lose. Only this week, the hedge fund H Partners succeeded in ousting the chairman, the chief executive and others at Tempur Sealy after a bitter, bitter battle.
According to FactSet’s corporate governance database, SharkRepellent, this year, the activists are winning 77 percent of the time once a proxy contest starts and ends. And while this year more companies are fighting back, each of these situations is a bit different. It will only be strong companies like DuPont that resist. This may mean that activists with increasingly lesser reputations reach farther afield. But it will not change the norm, meaning most companies will settle proxy contests.
THE ACTIVIST’S NOMINEE CAN MATTER The biggest issue forestalling settlement in the DuPont matter was the issue of whether to place a Trian representative on the company’s board. DuPont’s management objected, according to people close to the company, because it did not want a “back office” boardroom filled with Trian directors second-guessing its decisions. Trian directors would have their own staff members at Trian who could conduct independent analysis. And in truth, there was probably a real fear that the Trian directors would not give up the fight to break up DuPont.
But there are benefits to having board members questioning decisions and providing focused analysis. The downside is that some shareholders have a privileged connection, and perhaps differing priorities, than the rest of the board and other shareholders. Still, this type of “back office” board is found frequently in both the private equity world and the world of shareholder activists. This is an issue worth thinking harder about.
SHAREHOLDERS THINK Both proxy advisory firms Institutional Shareholder Services and Glass Lewis recommended in favor of certain Trian-nominated directors. So it is easy to notch this as a “defeat” for the proxy advisory services. According to The Wall Street Journal, big institutional investors like Vanguard Group, BlackRock and State Street Corporation all sided with DuPont.
But perhaps the DuPont victory signals that the firms are indeed serving solely as advisers, and shareholders do actually pick and choose whether to heed their advice rather than following it blindly. For a company that has a good message and a clear position in a proxy fight, losing I.S.S.’s recommendation is not necessarily a death sentence. The company can take it to the streets with shareholders who are not automatons.
WINNING IS NOT WINNING DuPont didn’t win. It engaged in a bruising battle with shareholders. This is divisive, even in victory. Trian is still an owner of DuPont with about $2 billion worth of stock. It would behoove everyone to play nice and move on. Remember shrillness — and sore losers — can hurt.
LOSING CAN BE WINNING DuPont’s stock is down more than 5 percent on Wednesday, postvote. These are short-term losses, where the stock trades in the future remain to be seen. But in the long run, the exercise has forced the company to vigorously argue and refine its strategy. This may not be the strategy that Trian wants, but it is probably better than where DuPont was before. Moreover, Trian may or may not go away. DuPont knows this. Its influence will remain as long as it is an owner.
In the end, shareholder activism is like an unwanted tattoo: annoying and indelible. Once the argument devolves to who is winning and losing the point is missed.
Instead, shareholder activism is about how companies are going to manage and interact with their shareholders going forward. The conduct of DuPont and Trian after this battle may be more important than the winner or loser of the proxy contest. For shareholder activism, this battle will be a milestone of a maturing industry.