Meet Your Worst Nightmares!
from Spring 1999
by Ann Reilly Dowd
No, they are not those annoying gadflies who kick up dust at your annual meetings then disappear, or even the do-gooders who would have corporate America fix everything from labor practices in Myanmar to global warming. These are the real troublemakers—the giant institutions, the hedge funds, the arbs, and a couple of cranky individual investors—who together form the leading edge of a shareholder activist movement that’s getting more aggressive, sophisticated, and effective. These are the guys and gals who can turn your life upside down, putting your company, your job, and your fortune in play. Dismiss them at your peril.
Of course, CEOs and board members at companies that are doing well by investors—both in terms of stock prices and shareholder rights—can sleep soundly. But if your stock is lagging the market, or you’ve been ignoring shareholder demands, you could find yourself living your own version of The Scream. “The focus of shareholder activism will broaden in 1999,” says Patrick McGurn, vice president of Institutional Shareholder Services, which tracks shareholder resolutions and advises companies on how to vote. “Expect a very busy year.”
Not only will activists widen their target range—taking aim at poison pills, audit committees, repriced stock options, and more (see “The Issues” on page 30), but they are planning to use powerful new weapons to bring recalcitrant managers and directors to heel. Among them: binding shareholder resolutions. (For more new methods, see “The Tactics” on page 31.) Meanwhile, more and more activists are teaming up both domestically and internationally. For example, a bellwether alliance between the activist California Public Employees Pension Fund (CalPERS), America’s largest public employee pension plan, and Hermes Pensions Management, Britain’s biggest pension-fund manager, means the two institutional powerhouses will increasingly vote their shares—worth more than $62 billion in the United States and $36 billion in Britain—together. Call it the globalization of shareholder activism.
Indeed, no CEO or board member dares ignore these folks. Last year, they pressed for shareholder-friendly reforms at more than 60 companies. In the first eight months of 1998, they won effective board control at 10 firms, including Furr’s/Bishop’s and Apria Healthcare. What’s more, in nine of the 10, the change came without formally offering to purchase a single additional share of the target firm’s stock. Essentially, what corporate raiders did in the 1980s at great cost and high risk, shareholder activists are achieving in the 1990s on the cheap.
So what do you do if the activists start kicking? “The first thing is to take a deep breath and think,” says McGurn. “All too often, senior managers and directors assume a knee-jerk defensive position. That is exactly the wrong reaction.” After all, most activists would prefer to sit down and negotiate than go to the mat. And even if you agree to disagree, at least you’ll have had the chance to size up the opposition. “It’s truly self-defeating to set up an adversarial relationship with escalating rhetoric that could damage your relations with shareholders for years,” warns McGurn. “Even if you win the battle you can end up losing the war.”
So who are these corporate stalkers? What drives them? What satisfies them? And what good do they do for shareholders? Basically, there are three different types of activist organization, each with its own style:
Pension funds. With hundreds of billions of dollars invested in virtually every major company in America, pension funds are the ultimate long-term investors with elephant-size memories and staying power. “These institutions have no vested interest in putting a company in play—though some of their targets do end up getting taken over,” says McGurn. “Rather they want long-term enhancement of stock values to boost pension payouts 20, 30, 40 years into the future.” But that doesn’t mean these giants are passive. Quite to the contrary, a significant minority are more than willing to throw their weight around to improve corporate governance and boost long-term returns.
Private investment funds. The institutions may have size on their side, but these funds are swift, fierce, and rapacious. They, too, look for companies that are underperforming the market because of poor management and agitate for change through behind-the-scenes pressure as well as shareholder resolutions and proxy battles. But since they run private investment funds, they are generally less patient than their institutional cousins, expecting to turn significant profits in shorter periods. Your worst worst nightmare: when the elephantine institutions team up with the shark-like private funds for ravaging results.
Individual investors. They don’t have multimillion dollar funds, big budgets, or fancy offices. But what these loners lack in heft they make up in speed and passion. Closed-door meetings with CEOs is not their style. Instead, they unleash an avalanche of shareholder proposals designed to attract votes and force change. Last year, individual activists accounted for nearly two-thirds of all shareholder resolutions that made it to a vote, and they won an average 24.5% of votes, only slightly lower than the overall average.
In the pages that follow, we profile of the most feared and fearsome activists in all three categories, including their modi operandi and their agendas for 1999.
TIAA-CREF
Of all the pension funds, there is none bigger than Teachers Insurance and Annuities Association-College Retirement Equities Fund with $222 billion in assets under management. Last year, Teachers sent a tremor through boardrooms worldwide when it became the first institutional investor ever to unseat an entire corporate board, that of the floundering Texas-based cafeteria chain Furr’s/Bishop’s. (See “The Board From Hell,” Corporate Board Member, Autumn 1998.) With some 18% of Furr’s stock in Teachers’ portfolio, the giant pension fund persuaded fellow institutional investors to join in a landmark proxy battle to put in place new directors handpicked by Teachers. “It was a watershed action that is out of pattern for us,” says B. Kenneth West, Teachers’ senior consultant for corporate governance. “It may never happen again. I hope it doesn’t.”
Perhaps. But the Furr’s battle offered a rare glimpse of the clout that Teachers exerts, more typically behind the scenes. “We’re quiet negotiators,” says West, noting that the fund targets 30 to 40 companies a year. “Many other activists pick poor financial performers,” says West. “Teachers looks at principles of corporate governance first—then financial performance.” Among its hot buttons: anti-takeover devices and board independence. Indeed, pressure from Teachers persuaded Tony O’Reilly, then CEO of H.J. Heinz, to add outside directors to his board and to make one of them chairman of the nominating committee. But when closed-door diplomacy fails, Teachers is more than willing to slug it out—and not just with corporate basket cases like Furr’s.
Just ask Disney’s Chairman and CEO Michael Eisner, who has the scars to prove it. At Disney’s 1998 annual meeting, Teachers won a substantial 35% of shareholders’ votes in favor of its proposal requiring a majority of outside directors. “Disney’s performance was spectacular, as was Eisner’s,” says West, “but there were indications that the board was not so independent.” One indicator was Eisner being given options on eight million shares in 1996. West estimates they could be worth $230 million if the stock appreciates just 5% a year for the next 10 years. “It just didn’t pass the smell test,” says West. Since Teachers’ strong showing, Eisner has agreed to put the entire board up for a shareholder vote each year and to withdraw the company’s poison pill. Says West: “There’s been real progress.”
For the 1999 proxy season Teachers had already filed, as of the beginning of January, four shareholder resolutions calling for independent boards and 10 rescinding so-called dead-hand poison pills, which can only be removed by the directors who approved them. West won’t name names. “One of the good things about our approach,” says West, “is we almost always get what we ask for.” It’s when they don’t that you’ll hear them roar.
CALPERS
This $140 billion state pension fund is more willing than TIAA-CREF to make noise. CalPERS publishes an annual “hit list” of 10 or so companies whose corporate governance policies are unfriendly to shareholders and whose economic and stock performance is poor. Before releasing the list, CalPERS approaches the companies privately with suggestions for changes in governance policies and business plans. But if they are rebuffed, they go public with their beefs and enlist the support of other institutional shareholders behind resolutions designed to force change. “CalPERS has a high batting average in convincing corporations to negotiate and typically ends up withdrawing their shareholder proposals,” says McGurn. In the past, however, it’s won proxy fights and successfully agitated for management changes at such major U.S. companies as IBM, Westinghouse, and Avon.
Last year, CalPERS won an overwhelming 67% of shareholder votes for a resolution requiring the board of Sybase, a poorly performing California-based software company, to elect members annually and establish an independent chairman. The pension fund also helped the hotel and restaurant employees union win shareholder support for a resolution blocking the management of Marriott International from creating a dual-class stock structure. Said CalPERS Investment Committee Chairman Charles Valdes: “This action serves as a reminder to the Marriott family that we are the patient long-term capital of the company and part of this ’family.’ We won’t be forced into a system that treats family members unequally.”
This year, expect CalPERS to continue to press for such long-standing priorities as a majority of independent directors on boards, separate chairman and CEO positions, lead independent directors, the annual election of all directors, and shareholder approval of any option repricing. “CalPERS has been most effective at setting the tone of the debate and pushing the policy envelope,” says Ralph Whitworth of Relational Investors LLC, an activist fund that invests in underperforming companies and is backed by CalPERS. “They are the trendsetters.” The most recent example: their landmark alliance with Hermes, which manages $58 billion in British pension fund assets. “Through this alliance,” says William Crist, president of CalPERS Board of Administration, “the corporate governance message will be louder and stronger and will be heard in a voice that is influential and indigenous to each market.”
State of Wisconsin Investment Board
Of all the pension funds, Wisconsin is the most stubborn and in-your-face. Consider the saga of option repricing, an increasingly common practice in which corporations lower the exercise price on underwater options. While some corporate leaders consider repricing a necessity in order to keep critical employees, a growing chorus of shareholder activists, led by Wisconsin, call it highway robbery. Says a senior strategist for the $59.3 billion fund: “Option repricing saddles the shareholding public with the entire loss of underwater options and circumvents shareholder voting. Companies are unilaterally changing the game in the middle of the fourth quarter.”
Wisconsin targeted 22 companies last year to block unilateral repricing, and 18 of them agreed to put future repricings to a vote. Wisconsin then proposed binding bylaw amendments at three of the four remaining companies: Shiva Corp., StorMedia Inc., and Cardio Thoracic Systems. Shiva fought back, successfully winning a ruling from the Securities and Exchange Commission excluding Wisconsin’s proposal from its ballot. But Wisconsin kept up the heat, ultimately winning a reversal of the SEC decision in federal court. The pension fund also won a bellwether ruling by the Delaware Chancery Court forcing Cardio Thoracic to open up its records regarding option repricing to Wisconsin.
But the battle is hardly over. Wisconsin is fuming over the fact that several of the 18 companies that agreed to a shareholder vote last year have since recanted. “Those agreements weren’t worth the paper they were written on,” gripes one Wisconsin lawyer. (Like other Wisconsin activists, this source declined to be photographed or identified by name.)
Madder than hell now, Wisconsin plans to pursue more binding resolutions this year to force shareholder votes on option repricing. Among its targets: Advanced Micro Devices, Ascend Communications, Cambridge Technology Partners, and Idex Laboratories. Wisconsin also has filed binding resolutions requiring shareholder votes on poison pills at AMP, Applied Materials, Eastern Enterprises, Monsanto, and Union Carbide. Says one Wisconsonite: “We provide an often not-so-gentle reminder that there are institutional investors out there who own stock and really do care how companies are run.”
AFL-CIO
The issue that gets under the AFL-CIO’s skin is excessive compensation, and the pension fund has made John Krol, former chairman and CEO of DuPont, a poster boy for overpaid executives. The fund’s popular Paywatch website (www.paywatch.org) has this to say about him: “While pocketing an astounding 38% increase in his 1996 cash and bonus compensation, Krol simultaneously announced plans to lay off 1,500 employees.” His 1997 “loot,” as Paywatch terms it: more than $3 million in cash compensation ($975,000 in salary and a $2.1 million bonus) plus as much as $47.6 million in stock option grants.
Krol was one of 10 CEOs profiled in “Too Close For Comfort: How Corporate Boardrooms are Rigged to Overpay CEOs,” a 1998 AFL-CIO study. “Our data,” the study says, “suggests the executive compensation system remains under the influence of the very executives it purports to supervise, who, in turn, rely on networks of personal relationships to frustrate the intentions of regulators and shareholders.” Last year, the study became the basis of 17 labor-backed proxy resolutions designed to force greater independence on compensation committees. Although none passed, the votes were surprisingly high for first-time efforts: DuPont, 23%; Advanced Micro Devices, 30%; Healthsouth, 36%. Says AFL-CIO strategist Bill Patterson: “Clearly we’ve struck a chord.”
Overall last year, unions sponsored 120 shareholder resolutions—17% of all filed—and won 10. Among them: proposals to require shareholder approval of poison pills at CSX Corp., J.C. Penney Co., Venator Group (formerly Woolworth), and Wellman Inc. This year, expect more resolutions with an accent on compensation committee independence, as well as shareholder approval for premium-priced options, option repricing, and poison pills. As of the first of the year, the Teamsters already had filed or had firm plans to submit 15 resolutions, including one for repealing the classified board at Texaco and one to require annual board elections at Kmart. The AFL-CIO is pushing a similar proposal at Oregon Steel Mills, as well as a plan to require shareholder approval for any poison pill. Other unions likely to be active on the shareholder front in 1999 include the Communications Workers of America, the Union of Needletrades and Industrial Textile Employees, the Service Employees, and the Electrical Workers.
LENS INC.
Nell Minow may look like a perky soccer Mom, but in the world of corporate governance, she’s known as a CEO slayer. As a principal of the $100 million LENS Inc., a private investment fund that will soon double its assets through a merger with Hermes, Minow and founder Robert Monks have had an extraordinary kill rate: Of the first 10 companies they targeted since their 1991 launch, nine—including American Express, Kodak, Westinghouse, Sears Roebuck, and Waste Management—have replaced their CEOs, as well as a bevy of board members. Some—including Waste Management and Sears—have also been taken over or broken up. “In a third of the cases,” says Minow, “we have a terrific meeting with the CEO on his plans to turn the company around. In a third, he says he doesn’t need our advice, and we keep the pressure up until he sees the error of his ways. And in a third, there is a knock-down, drag-out fight.”
Among the longest and bloodiest was LENS’ war with Waste Management, the nation’s leading garbage hauler. Once a Wall Street darling, the company had grown fat and arrogant by 1995 when it first caught LENS’ attention. “The organization chart looked like the Department of Health, Education and Welfare under Lyndon Johnson,” says Minow. What’s more, eight board members were current or former insiders or had other financial ties to the company. “Two-thirds of the board were on the payroll!” exclaims Minow. Not surprisingly, the stock was going nowhere fast.
Spotting a turnaround opportunity, LENS bought into Waste Management and began building a coalition of angry investors, including hedge fund operator George Soros and Wall Street firms Bear Stearns and Merrill Lynch. Launching a campaign of angry letters, meetings, press releases, and proxy battles, they agitated for the sale of noncore assets, the appointment of independent directors, and the replacement of chairman and CEO Dean Buntrock and, later, his successor, former CFO Phil Rooney.
At the 1997 annual meeting, Monks made the chairman of the audit committee explain eight years of special charges, one by one. By mid-1997, the dissidents had gotten most of what they wanted, including a major restructuring, the addition of independent directors, and the resignation of CEO Buntrock, CEO Rooney, and eight board members. But by October 1998, the company was rocked anew when newly appointed CEO Ronald LeMay resigned, warning of accounting problems that ultimately led to a mammoth $3.5 billion pretax write-off. Four months later, with management in disarray and the stock plummeting, the company merged with a much smaller rival, USA Waste. By the end of 1998, the stock had risen by about a third to $45 from a yearly low of $34.44.
Heading into this year’s proxy season, Minow says her prime target will be underperforming companies with inattentive audit committees. Says Minow: “If directors can’t take the heat they should get out of the kitchen.” Among those on her hit list: Juno Lighting, Temple Inland, Readers Digest, and Pharmacia & Upjohn.
GUY WYSER-PRATTE
In his native France, this former U.S. marine officer turned arbitrageur is known as “Schwarzkopf” for his combative, take-no-prisoner’s style. But unlike most arbs who move in and out of stocks faster than a Tomahawk missile, Wyser-Pratte sticks with the underperformers in his $500 million portfolio, pushing change with an arsenal of activist tactics including proxy battles and running his own candidates for the board. Over the last 20 years, he has targeted some 25 companies. Among his victories: forcing Sears Roebuck to spin off its Allstate Insurance subsidiary, US Shoe to surrender to hostile Italian bidder Luxottica, and Penzoil and Telxon to replace their poison pills with his “chewable” version, requiring them to accept any takeover offer that meets certain conditions. Says Wyser-Pratte: “To be tough-minded in matters of conflict is critical.”
Recently, he moved to increase his firepower by organizing a coalition of institutional giants including CalPERS, Wisconsin, and several union pension plans to force some 200 companies with expiring poison pills to put renewals to a shareholder vote. “Their purpose is to further entrench the entrenched,” says Wyser-Pratte. “Now we have the antidote, and it’s making some managers and directors extremely nervous.” Quips Wyser-Pratte: “In corporate America, we are the devil.”
Before long, that feeling could spread throughout Europe as well, where the Franco-American activist has joined up with Sophie L’Helias, a 35-year-old French powerhouse whose Franklin Global Investor Service is the public face for many American and British institutional funds unhappy with French management. Already they have helped precipitate a breakup of Strafor Facom, an office equipment and engineering company. Among their current missions: to force champagne maker Taittinger to sell its 35% stake in luxury goods manufacturer Societe du Louvre. Says Wyser-Pratte: “France needs the biggest kick in the pants.”
GREENWAY PARTNERS
“You’ve got to get new management,” Alfred D. Kingsley and Gary K. Duberstein, the dynamic duo who run hedge fund Greenway Partners, told Unisys CEO James Unruh in a tense meeting at their Park Avenue office. When Unruh refused to step down, Kingsley and Duberstein moved into high gear, orchestrating a proxy battle to force the company to split Unisys into three parts. Although the resolution only won 30% of shareholders’ votes, Greenway ultimately got its way when, two months later, Unruh quit.
Losing no time, Kingsley contacted the search firm hired to find a new CEO and suggested Andersen Worldwide CEO Lawrence Weinbach, who was ultimately hired. “He was perfect,” raves Kingsley. “In only one year, he has made miraculous progress in fixing the balance sheet.” As for Greenway, the stock it bought at $10 was recently above $34.
Kingsley and Duberstein both cut their teeth with greenmailer Carl Icahn. But at Greenway, there’s no greenmailing. Rather than taking money to go away, Kingsley and Duberstein stick with their target companies through their recovery or sale. Each year, they typically choose three or four underperformers in which they amass sizeable holdings. If talk doesn’t work, they launch the familiar arsenal of corporate governance weapons to force change. But if that fails too, Kingsley and Duberstein are willing and able to take the next step and put together an investor group to take over the company.
Consider the case of Outboard Marine, a troubled power boat manufacturer in which Greenway owned a 10% stake. During a long-anticipated vacation in Spain in 1997, Kingsley got a call informing him that Detroit Diesel had made an offer to buy the company at $16 a share when it was trading between $18 and $19. “It’s a take-under,” Kingsley bellowed into a cellphone at the swimming pool. “We can’t let this happen!” In just 30 days, Greenway put together a group of investors, including George Soros, that topped Detroit Diesel’s bid with a winning $18 a share offer. Since then the group has taken Outboard Marine private, replaced senior management, and, according to Kingsley, is turning the poor performer around. Says Duberstein: “We are very happy.”
Heading into the new year, Greenway’s targets include Venator, which Kingsley and Duberstein believe should concentrate on its athletic footwear (FootLocker) business and spin off underperforming assets; and Greyhound Bus, where Greenway is opposing a takeover bid. “In this case, the company is not poorly managed,” says Kingsley. “It’s a value issue. The price is just too low.”
BILL STEINER
“I am not principally a do-gooder,” insists Bill Steiner, a millionaire investor with attitude. “I’m a businessman and I never wasted a penny. Yet I see millions of dollars wasted in public companies on corporate perks and all that junk, and it aggravates me. Believe me, I’d rather be going to the opera. But somebody’s got to do something.”
And so he does. Working with a yellow legal pad (no computer), newspaper clips, Value Line, and several volunteers in his basement in Great Neck, New York, Steiner, who refuses to give his age, produces an avalanche of shareholder resolutions with bite. But make no mistake, Steiner is no mere crank. Says Nell Minow: “Steiner proves you don’t need a big office or a big budget to have impact. In terms of octane, he’s the highest.”
Steiner’s influence far exceeds the size of his investment—typically a thousand or so shares, or, as he puts it, “a spit in the bucket.” His secret: a nose for poorly managed companies and resolutions that resonate with shareholders big and small. In the early 1990s as co-president of the Investors Rights Association of America, a grassroots group of individual investors, Steiner dealt a death blow to a once-common perk, outside directors’ pensions. The group eliminated them at 30 companies, including American Brands, Dow Jones, GTE, Merck, and Time Warner. “They created a revolution that rocked the corporate community and created major change,” says McGurn, noting that the percentage of big companies giving outside directors pensions has plummeted from nearly 70% in the early 1990s to less than 20% today.
Going it alone since last year, in 1998 Steiner filed resolutions at more than a dozen companies, calling on management to sell the firm to the highest bidder. Many of those companies ended up merged, sold, or taken over. Among them: Digital, Tandem Computer, Tyco Toys, and Salomon Brothers. “There is not necessarily a direct cause and effect,” says Scott Fenn, executive director of the Investor Responsibility Research Center. “But Steiner has put some underperforming companies in the spotlight. He’s a catalyst.” Already this year, Steiner has filed similar resolutions at 23 companies including Toys “R” Us, Excel, Whirlpool, Circus Circus Enterprises, Sbarro, and Perrigo. Poking his finger at a stock chart from the Perrigo annual report that showed a dismal decline while the Dow and industry peers were rising sharply, Steiner demands, “Is that a well-managed company? Is it? I don’t think so.” Nor are targeted CEOs laughing. As one told Steiner: “Your resolution felt like the kick of a horse in the pit of my stomach.”
The Tactics and Issues for 1999
