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Activist Investors Have Taken Aim at Retail

Activist shareholders like William Ackman have long taken an interest in the retail and apparel sector.

Activist shareholders like William Ackman have long taken an interest in the retail and apparel sector.

Even as the drama at J.C. Penney Co. Inc. seemed to subside, on Tuesday, Jos. A. Bank Clothiers Inc. saw its shares surge 12.5 percent to $45.33 after BeaconLight Capital sent an open letter to the company’s board criticizing its corporate governance and compensation practices.

More recently, The Jones Group Inc. in June saw activist investor James Mitarotonda, chairman and chief executive officer of Barington Capital Group join its board. Mitarotonda has a history of pushing Warnaco Group Inc., Dillard’s Inc., Nautica, Harry Winston and others to tighten up operations. Barington has a 2.3 percent stake in Jones and has been pushing for the apparel group to sell off some smaller brands and tighten up operations. Jones has hired Citi to explore its options and is currently reviewing bids for the entire company, just the apparel division and just the footwear division.

Michael Appel, president of consulting firm Appel Associates, which specializes in turnarounds and management-performance improvement, said, “Activist investors can play an important purpose when they identify companies that are undermanaged and underperforming, and press for change that will improve performance and shareholder return. Some activist investors may have a short-term horizon and that can be detrimental to building long-term shareholder value, but many push for positive change.”

Appel said that on most boards he’s been on, directors have tried to do the right thing. There are not that many lawsuits against board members because most exercise two key duties: duty of good faith and duty of due care. In Appel’s view, the key area of dispute often centers on “an honest difference of opinion on what is the right thing or right course of action.”

But what is the role of an activist shareholder who is also on the board?

According to Robert L. Chapman Jr., managing member of Chapman Capital: “In exchange for being given the privilege of having a board seat and the attendant influence on the company from the inside, the activist sacrifices the ability to publicly reprimand its executives and fellow board members, in addition to being restricted from buying and selling shares at will. J.C. Penney and Bill Ackman is a textbook case of the latter trying to have his cake and eat it too, and until banished from the boardroom he thought he could pull it off.

“The nearly universal and rightfully harsh backlash against Ackman’s behavior derives not just from his transgressing that insider-or-outsider rule, but this guy rightfully lost the privilege to criticize J.C. Penney’s executives and directors the minute the apple of Ackman’s eye, hand-picked fellow superhero Ron Johnson, was exposed as something of a charlatan. Thus, under normal circumstances Ackman’s waging of internecine war was unacceptable, but this was an abnormal case wherein Ackman had activist blood on his hands well before he drove the corporate dagger into [Myron] Ullman’s back,” Chapman said.

Chapman and Ackman have locked horns in the past, most recently earlier this year over Herbalife.

Ratings agency Standard & Poor’s last month issued a report about the impact of activism on corporate management and governance. Laurence Hazell, a governance specialist in the S&P Corporate Ratings group, said that how management and the board responds to the activist proposals can provide good insight “about their qualities as leaders of the corporation,” such as their willingness to listen to and consider alternative perspectives and their “ability to adopt a new direction or convincingly articulate why their own current plans are the right ones…”