Media Clips
Wall Street Journal Europe
April 7, 2008
More activist investors are invited on to boards — Governance rules give proxy challenges added credibility
By Phred Dvorak and Joann S. Lublin
LATE LAST YEAR, executives of U.S. family-restaurant chain O'Charley's Inc. got a shock. Hedge fund Crescendo Partners LP said it owned 11% of the company, wanted O'Charley's to pursue a different strategy and, to make sure its demands were heard, wanted four of the board's nine seats.
In the past, a company in O'Charley's situation probably would have resisted and weathered a proxy fight at the shareholders' meeting. Instead, O'Charley's last month proposed giving Crescendo three seats on an expanded board. Crescendo agreed.
A proxy fight "would have imposed a significant cost on the company, and thus the shareholders," says Lawrence E. Hyatt, O'Charley's chief financial officer.
Activist investors like Crescendo increasingly are penetrating boardrooms without a fight. In the first quarter, 30 U.S. companies ceded seats to dissidents without proxy fights, up from 23 in the same period last year and nine in 2006, according to data tracker FactSet SharkWatch. Among companies formally targeted by activist investors, fewer take the matter to a shareholder vote: 32% last year, down from 61% in 2001.
New York Times Co. last month agreed to give two board seats to hedge fund Harbinger Capital Partners and investment firm Firebrand Partners LLC, which want the publisher to sell assets and invest in new-media properties. Motorola Inc. recently offered two seats to activist investor Carl Icahn, though Mr. Icahn rejected the offer and continues to seek four board seats.
"Until now, most boards have had a knee-jerk reaction to hedge funds, saying, 'They are evil. We don't talk to them,'" says Stephen Davis, a governance project director at Yale University's School of Management.
That's now changing.
"You will see more large shareholders being invited on to boards" without proxy fights, says Richard Breeden, a former Securities and Exchange Commission chairman and now an activist investor. His $1.5 billion Breeden Partners fund has won board seats at three companies, two through negotiated settlements.
There are several forces behind the shift. Changing corporate-governance rules give investors a bigger say on the election of directors and make proxy challenges more credible. Activists, meanwhile, are more selective, seeking a handful of board seats instead of trying to oust a full board and focusing on battles they think they can win, says Damien Park, a consultant who advises companies on dealing with activists.
"Over the years, it has become somewhat easier for me to get board seats without going through a proxy fight because the company realizes that I'm not going away," Mr. Icahn says.
Activists are enhancing their credibility by nominating experienced corporate leaders for their slates. Mr. Icahn's nominees for Motorola's board include former Viacom Inc. Chief Executive Officer Frank Biondi Jr. and veteran investment banker William R. Hambrecht.
Former Northwest Airlines Corp. Chairman Gary Wilson is on an activist slate for the first time. Mr. Wilson says he accepted the invitation from two hedge funds to seek a board seat at CSX Corp. partly because he favors separating the chairmanship from the CEO. CSX's bylaws mandate that one individual hold both roles. A spokesman notes that CSX shareholders overwhelmingly defeated a 2006 resolution proposing to split the posts.
Board seats are "how owners can represent themselves," Mr. Wilson says. "It's capitalism going in the right direction."
Gaining a board seat doesn't guarantee big changes, however. Jerome York quit the board of General Motors Corp. in October 2006, after serving less than a year and failing to push through an alliance with Renault SA and Nissan Motor Co. Mr. York had represented billionaire Kirk Kerkorian, at the time GM's biggest individual investor, who sought the alliance.
Crescendo CEO Eric Rosenfeld says he had to switch gears after winning a proxy contest for a seat on the board of Canadian aviation-services company Spar Aerospace Ltd. in 1999. Mr. Rosenfeld initially sought a quick sale of the company, and executives agreed to solicit offers. But even Mr. Rosenfeld didn't like the offers. Instead, the board and management bolstered operations before selling the company to L-3 Communications Holdings Inc. in 2001 for around $114 million.
Other times, a dissident seat on a board can presage big changes. After negotiating two board seats at Sovereign Bancorp Inc. in 2006, activist investor Ralph Whitworth successfully lobbied for the ouster of the bank's CEO. Mr. Whitworth threatened proxy fights at Sprint Nextel Corp. and Home Depot Inc., prompting management shake-ups that led to the resignation of both companies' CEOs last year. In the past 12 years, Mr. Whitworth's Relational Investors LLC has obtained board seats at 13 companies through negotiated settlements.
Some boards and executives come to value one-time dissidents. Bryant A. Riley, founder of Riley Investment Management LLC, joined the board of golf-club-shaft maker Aldila Inc. in 2003 through a negotiated settlement. Today, Aldila CEO Peter R. Mathewson says the board calls Mr. Riley "the analyst" for his expertise on stock buybacks and special dividends. "He has not been saber-rattling," Mr. Mathewson says. "He is rational."
Other companies view activists as less benign. Women's apparel retailer Charming Shoppes Inc. last month sued two hedge funds and their managers -- including Crescendo and Mr. Rosenfeld -- that are campaigning for board seats at the company's May 8 shareholders' meeting. In the suit, Charming Shoppes says 10-year-old Crescendo has a "sordid history of greenmailing and corporate raiding," and alleges the funds misrepresented their intentions.
Mr. Rosenfeld says Crescendo is a "patient activist" that prefers to negotiate with boards. He declined to comment on the suit.