Wednesday, August 25, 2010

CEO Succession Planning & Shareholder Activism

Executive transitions at Hewlett-Packard, Sara Lee, GM and BP provided a topical backdrop for our presentation last week to the Southwestern Regional Conference of the National Investor Relations Institute.

The main sideshow was H-P’s handling of its decision to replace Mark Hurd including sending an under-prepared Marc Andreesson to front its public face, demonstrating its not just the decisions that you make but how you message them that is so important; the company saw $13.7B of shareholder value evaporate in a week.

The presentation centered on CEO succession and shareholder activism, coming soon after the SEC’s policy reversal on the issue and our subsequent Conference Board paper that analyzed the implications thereof.

In the session, we emphasized the following points:
  • Many companies and boards do a poor job of CEO succession planning
  • A changing governance climate is placing responsibility firmly in the boardroom; CEO succession is now recognized as a major policy and risk issue
  • Poor CEO transition management is a big deal and a major business discontinuity
  • Drawing  a correlation between external CEO hiring and unpalatable levels of executive compensation, large investor groups are starting to challenge corporations to reveal details of their internal succession practices
  • Companies will soon see activist investors leverage CEO succession-related governance deficiencies to advance their change agenda
We urged Investor Relations executives to avoid shareholder angst by helping their companies get ahead of the issue, including:
  • Knowing (and influencing) what the Board’s role in CEO succession planning should be
  • Understanding why shareholders  care about CEO succession planning
  • Providing high level disclosure of CEO succession planning process to reassure shareholders of the Board’s oversight
  • Knowing that there is no other job like the CEO … and that internal development is a multi-year process – absent such internal process external hiring (and higher costs) become inevitable

 A copy of the presentation follows.

NIRI Southwest CEO Succession and Shareholder Activism

Posted by Edward Ferris, Partner Hedge Fund Solutions

Thursday, August 19, 2010

The Battle Over Barnes & Noble Continues

Hedge Fund Solutions has been following the ongoing activist situation at Barnes & Noble, Inc. ("BKS") since early 2009 when billionaire Ron Burkle – who runs the investment firm Yucaipa – first disclosed an 8.3% ownership position at an average cost of $14.68 per share.  Since then, Burkle has increased his ownership to just under 20%. Deep value investor Aletheia Research & Management - which has previously stated its support of Burkle's activist campaign - has since accumulated a little more than 16%.
[Click here to review Aletheia's investment positions as of June 30, 2010]

In response, BKS installed a shareholder rights plan that would go into effect when an individual shareholder accumulates more than 20% of the Company's outstanding stock or when multiple shareholders, "who combined own over 20%, enter into an 'agreement, arrangement or understanding… for the purpose of acquiring, holding, voting… or disposing of any voting securities of the Company.'"  However, under the terms of the poison pill, the 20% trigger would not apply to the Riggio family, which owns a substantial equity and management stake in the Company.

"We believe having over 37% of the Company shares in the hands of the Riggio family and other insiders, coupled with the 20% ownership limitation enforced on other shareholders under the poison pill, has a coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest", argued Burkle in a January 28 letter to the board of BKS.  "[T]he Board is sending a message to the other shareholders and the investing community that Barnes & Noble is a company controlled and operated for the benefit of selected insiders."

After the BKS board rejected Burkle’s request to raise the poison pill's threshold to 37% - equivalent to the Riggio family's ownership - Burkle filed a lawsuit against BKS in the Delaware Chancery Court on May 5. His complaint: the member of BKS' board breached their fiduciary duties of loyalty, care and good faith by adopting and maintaining a discriminatory poison pill without any legitimate corporate purpose.

On August 3, in a move that suggested BKS' belief that the Delaware Chancery Court would rule in favor of Burkle, BKS issued a press release stating its interest in "a possible sale of the company, in order to increase stockholder value". In addition, the Company began settlement discussions with Burkle, reportedly agreeing to offer him three board seats on a nine person board. However, settlement discussions broke down just before the Chancery Court's ruling, presumably because Burkle was unwilling to agree to a two-year standstill, which would restrict him from seeking additional board representation next year.

Then, what appeared to be a nearing end to the two parties' disparity, proved false, morphing into an inevitable proxy fight.

On August 11, Vice Chancellor Strine dismissed Yucaipa's complaints, arguing that BKS' poison pill was a proportionate defense against Yucaipa's growing stake in the Company and did not preclude Yucaipa's ability to run a successful proxy campaign. (Strine's Decision can be found at the end of this article.) BKS announced the following day that settlement discussions between the two parties had ended.

Following the ruling, on August 18, in a preliminary proxy statement, Yucaipa announced their intention to nominate three individuals to the BKS board of directors at the next annual shareholder meeting and to get the board to raise the poison pill trigger to 30%. Yucaipa's other plans have included BKS buying out at least part of its competitor, Borders Group, Inc., and to get BKS to enter into a partnership with a technology company - particularly, Hewlett-Packard Co. - in order to enhance BKS' product offerings and better compete against Riggio is not enthusiastic about any of these proposals. 

Posted by David Schatz
Strine Decision in Burkle's Lawsuit Against Barnes & Noble