DuPont vs. Shareholder Activism: A Win for Corporate America

Corporate America faces a growing wave of shareholder activists – some who affect positive change, and others who simply disrupt. The recent DuPont-Trian fight is an interesting example of how shareholder activism is developing today. It was in May of this year that DuPont triumphed over Trian Fund Management and its co-founder and billionaire activist Nelson Peltz in what was a very public proxy battle.

From the beginning it was clear that DuPont wasn’t going to back down in its fight against hedge fund investor Trian. Even though the proxy fight lasted longer -- and was more expensive -- than anyone wanted, DuPont continued to stick to its guns.

That’s because DuPont CEO Ellen Kullman and her board believed that the decisions DuPont was making were the best decisions for the company’s shareholders.

Kullman’s win demonstrates that charting a clear, smart course for a company and then aggressively communicating those plans to its shareholders can be a winning strategy when it comes to handling an activist shareholder.

Are Shareholder Activists Making Unreasonable Requests?

The DuPont case was an interesting one in that the company seemed like an unlikely target. According to an exposé on the proxy battle published by Fortune.com, DuPont was doing well under the direction of CEO Kullman (its operating margins reportedly grew from 9.5 percent in 2008 to 16.5 percent in 2014), and the company had even made decisions since the proxy battle began that many thought would please Peltz.

But Peltz was looking for much more. According to reports, he wanted to see the company split into three parts and wanted four new Trian-nominated members on the DuPont board of directors – including himself.

The negotiations went on and the demands morphed slightly over time, but what didn’t change was Peltz’s requirement to be considered for the board of directors -- a deal-breaker condition for Peltz.

Along the way, it looked like Peltz would prevail. In April of 2015, proxy advisory services ISS, Glass Lewis and Egan-Jones came out in favor of electing Peltz to the DuPont board.

Many have wondered why Kullman didn’t just cave in and add Peltz to the board. Her response: she wanted to ensure that any nominated board member would add value to the company. The issue was addressed in the Fortune article:

… what she gets a lot from investors is, “Why not?” Why not put Peltz on the board? How much damage could he do? That response surprises Kullman. “I don’t think you put someone on the board based on the criteria of, What will it hurt? That seems like a very low bar,” she says. “I think you put someone on the board because they have particular skills that will help the company.” Kullman says if Trian wins she is going to have to replace two directors with deep backgrounds in science, and one with experience as a regulator, with a group of finance guys.

Earlier this year, Larry Fink, chief executive at BlackRock Inc., a large institutional investor, said he thought shareholder activists were becoming shortsighted.

From a report at WSJ.com, he said, “In my mind activists are trying to improve the company, in most cases, in the short term because they improve the company and then leave.”

He then reiterated that BlackRock wanted to be an active voice in the corporations in which it has investments, and that it was in it for the long haul; he generally sees antagonistic approaches as counterproductive.

In the DuPont battle, BlackRock was quietly working behind the scenes. In the end, BlackRock was one of the three largest shareholders in DuPont who, along with the other two, voted in favor of Kullman’s plan.

The Costs of Battle

The DuPont case has some interesting implications. Certainly the fact that Kullman and DuPont triumphed over their hedge fund activist suggests that corporations that believe they are acting in the best interest of shareholders can prevail without caving under the pressure of well-funded and public-facing activists.

In any case, the DuPont battle shows that even successful companies are not immune to shareholder activism.

And it has to be said: not all shareholder activism is bad. According to research by McKinsey & Company, “the median activist campaign reverses a downward trajectory in target-company performance and generates excess shareholder returns that persist for at least 36 months.”

But at what cost? McKinsey says it costs corporations something between $10 and $20 million to fight an activist campaign. Just look at DuPont and the running list of service providers it engaged to handle its proxy battle, including public relations professionals, investment bankers, lawyers, proxy solicitors and so on.

The toll that an activist campaign can have on directors and members of management themselves can be serious, too. Kullman worked diligently throughout the proxy battle to meet with shareholders and build the case for management.

(According to reports at Fortune, Kullman recounted Peltz telling her she did not want to get into a battle with him because he would win, it would make her life miserable and she’d never see her family.)

Dealing with Shareholder Activism

Lessons learned from the DuPont case and others serve as a roadmap to preparing for shareholder activism, which, by all accounts, isn’t going away.

Keeping in mind that there are times when shareholder activists can affect positive change in a company, it’s important not to dismiss what shareholders are telling us.

In April, I wrote a post featuring some very practical advice from Kerrii Anderson, former president of Wendy’s International, who has direct experience with shareholder activism.

Her advice? Dealing with shareholder activism starts long before an activist campaign lands in the spotlight of public scrutiny, and includes conducting vulnerability assessments, getting the right experts in place, and forging relationships with shareholders that are built on critical listening skills.

Many of you will likely agree that balancing the interests of short versus long-term investors is a difficult task. Now is the time to start working on mastering this balancing act.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.