Three Dillard’s Inc. directors fired back at activist shareholders Thursday, denying claims that management is overpaid, and standing behind the company’s strategy.

This story first appeared in the October 31, 2008 issue of WWD. Subscribe Today.

Barington Capital Group and Clinton Group, which collectively control about 5.3 percent of the retailer’s common stock, last week called on three of the firm’s independent directors to oust chief executive officer William Dillard 2nd. The investors said compensation for members of the Dillard family working at the firm topped $130 million over the last decade as operations faltered.

“While communications of this type do not normally warrant a public response, we believe it is time to set the record straight with respect to some of the more troublesome statements contained in this communication,” directors Robert C. Connor, Peter R. Johnson and Warren A. Stephens said in a written response to the letter from Barington and Clinton.

The Dillard family controls the retailer by virtue of its Class B shares, which allow them to elect directors to eight of the company’s 12 board seats. Connor, Johnson and Stephens are the only Class B directors who aren’t executives at the firm.

The directors noted, “We are deeply concerned regarding the state of the economy, the collapse of consumer confidence, retailing in general and the performance of the company in these troubled times. Nevertheless, we believe our management team has an appropriate strategy for dealing with the new environment.”

Dillard’s has said efforts to close underperforming stores, cut expenses and improve its merchandise mix are under way.

The company’s stock fell 28 cents, or 5.7 percent, Thursday to $4.63.

“The key issue is the performance of the company, which, over the past 10 years, has been nothing short of atrocious,” said James A. Mitarotonda, president and ceo of Barington Capital Group.

“We do not understand how supposedly independent Class B directors — with a fiduciary duty to all of the company’s stockholders — can continue to express confidence in the management team of Dillard’s,” Mitarotonda said.

Barington declined to say what its next step would be, but activist shareholder campaigns have a history of becoming litigious if they drag on long enough.

As for compensation, the directors said outside observers such as Institutional Shareholder Services and Glass Lewis & Co. found pay for the company’s ceo or top management below that of officers at comparable firms.