DuPont wins heated proxy fight (Whipple)

There was plenty of interest in the DuPont Company’s annual meeting this year due to a heated proxy contest. Trian Fund Management (holder of about 2.7% of the common shares) nominated and solicited votes for four directors. If elected, these nominees (including Trian’s president, Nelson Peltz) stood to bump four of the 12 management nominees and thereby acquire a 1/3 vote on the DuPont board.

There is often a negotiated settlement in such situations, and DuPont offered to accept one of the Trian nominees (not Peltz) on the board. This offer was rejected, and the two sides squared off in support of their respective positions.

Trian claimed DuPont was too big and had grown complacent. The company held assets that were unrelated to its business. (The DuPont Theater was sold several months later, and before the meeting DuPont was reportedly soliciting bids for its hotel and country club). There was $2-4 billion of excess overhead, too many businesses in the portfolio, and earnings targets had been repeatedly missed. A pending spinoff of performance chemicals businesses seemed like a step in the right direction, but consideration should be given to spinning off some other businesses as well.

DuPont management responded that the company’s stock value had risen smartly in recent years, showing that the existing business strategy was working. Corporate overhead had been and would continue to be managed carefully, but it would be shortsighted to slash the research budget and thereby jeopardize future growth and earnings. Further spinoffs would be counterproductive, given synergies between businesses in the portfolio. And the Trian nominees had little experience in the chemical industry.

Several proxy advisory firms announced support for some or all of the Trian nominees, basically buying the claim that the adjustments being recommended would result in a higher stock price. Delawareans were generally supportive of the existing management; many complained that Peltz et al. were excessively focused on the bottom line and had downplayed DuPont’s obligations to its customers, employees and the general public.

When the votes were tallied on May 13, it was found that DuPont management had carried the day – Trian’s first ever loss in a proxy contest – with the votes of individual stockholders providing the margin of victory. Having been bombarded with proxy materials from both sides, an unusually high percentage of these “retail” investors had filled out and returned their proxy forms. DuPont’s stock price fell sharply, closing down by $5.03 (6.8%) for the day from the adjusted close on May 12.

Was this a story of activist investors intent on reaping quick gains – by slashing DuPont expenses, leveraging up its balance sheet, buying back its stock, and then selling their stake & moving on – who had been repelled by a management team focused on building value for the longer term?

If so, it seemed that those who believe “shareholder value” is the measure of corporate excellence, trumping the interests of customers, employees, and the general public, had received their comeuppance!

As activist investors go, however, Nelson Peltz et al. have a reputation for taking a relatively long-term view of corporate performance. And the DuPont management team has been by no means indifferent to investor demands for improving financial results in the here and now. The stockholders did not have a choice between black and white, in other words, but rather between two different shades of gray.

Moreover, there is no need to reject financial results as the criteria for evaluating performance in favor of a composite scorecard that purports to measure results from the standpoint of all stakeholders. If other stakeholders are not being properly served, e.g., customers are not getting quality products at competitive prices, their dissatisfaction will be reflected in the financial results soon enough.

Criticism of the shareholder value model is often accompanied by suggestions for government intervention to compensate for the presumed deficiencies of capitalism. Shareholder value is OK, but cronyism is a problem, SAFE blog,

Thus, former Senator Ted Kaufman has written column after column for the News Journal advocating SEC regulation of corporate stock buybacks (9/7/14), supporting EPA restrictions on carbon emissions (6/29/14), demanding further financial reforms because the Dodd-Frank Bill didn’t fix the “too big to fail” (TBTF) problem (6/8/14), etc.

The real moral is not that the shareholder value model was weighed and found wanting, but rather that the DuPont management team had a good record and made its case effectively. And Trian deserves credit for offering their ideas, at least some of which have been or will be implemented, not brickbats for trying to upset the applecart. Capitalism wins at DuPont, Wall Street Journal,

DuPont shareholders were fortunate to be able to consider credible alternatives. Mr. Peltz has proven at H.J. Heinz and elsewhere that he can add value as a board member with formidable analytical skills and a laser-focus on shareholder return. And DuPont CEO Ellen Kullman has earned investor confidence with her market-beating returns since assuming the top job in 2009.

Good show, everyone!

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