“We almost don’t think of ourselves as activists.”
So said Jonathan Duskin, chief executive officer of Macellum Capital Management, on Wednesday, the same day Kohl’s revealed it was remaking its board, succumbing to months of pressure from an activist investor group, including Macellum, calling for change. Two independent directors nominated by the group — Margaret Jenkins and Thomas Kingsbury — will join Kohl’s board after the retailer’s annual meeting May 12. An additional independent director identified by Kohl’s and agreed to by the investor group, Christine Day, will also join the board.
“We identify companies that stubbed their toe and could use some help,” said Duskin, discussing his firm’s approach, at a Retail Marketing Society forum.
Duskin said his firm “first works more constructively with the board,” and that “our brand of activism is more like private equity in the public markets.” He said his firm seeks companies with “self-inflicted problems we think we can fix and where we think we can put people on the board to help fix it.” The question becomes, “Are shareholders going to join us in this endeavor or say go play in another sandbox?”
Through retailing, there’s been much disruption by activist campaigns including at Sears/Kmart, J.C.Penney, Charming Shoppes, Bed Bath & Beyond, Game Stop and Kohl’s.
“I see a lot of the breakdown of retail 101 stuff, like inventory architecture and management, assortment planning, good-better-best strategies,” said Duskin, who founded Macellum Capital, which invests in undervalued companies with potentially higher values through change in corporate strategy or governance, improvements in operations and capital allocation.
“I can’t believe more companies don’t invite activists to speak to their boards, but once the campaign starts, the defense — the bankers and counsel — everyone, they are generally open to listen. They want to hear your perspective,” Duskin said.
“There is also this sense of entitlement board members have. That you are not taking my seat. That this is my company,” Duskin added. “A lot of board members hold onto their seats perhaps past their time. The easiest thing a board can do is refresh themselves. Bed Bath & Beyond did it. Kohl’s just did it. They can adopt a lot of the initiatives you are focused on. Cost-cutting is a freebie. We [Macellum] are not short-termers. I don’t try to nominate myself to go on boards.
“One of my favorite sayings is, what is the long-term map? Companies that have failed for years and decades always talk about the long term.” That should be a focus, but not only one, Duskin said. “You’ve got to figure out how to create consistent shareholder value over time.”
Also speaking at the meeting were consultants Michael Appel, president of Appel Associates, and Jan Rogers, chief executive officer of J Rogers Kniffen WWE, as well as Richard Baum, managing partner of Consumer Growth Partners, who moderated the session, and Adam Rifkin, senior managing director, Guggenheim Securities, which advises companies on defenses from activists and other issues.
“Boards that are very self-reflective in a regular way are the ones that end up in better places,” Rifkin said. “Every six or 12 months boards should review a range of strategic and financial options. What we have seen are companies that don’t review their financial and governance profiles on a regular basis. They are the ones that make inappropriate answers and responses when an activist comes on the scene. In many situations, boards take a long-term approach to everything they are doing and many activists take a short-term perspective.”
Rifkin said many retail boards exhibit “insular behavior continuing to do things the way they have always done things and failing to transition their business, from a strategic standpoint or reallocating assets or restructuring their balance sheets. Generally, retailers and consumer companies that continue to reinvent themselves, moving their businesses forward, are the ones that don’t run into problems with activists.”
Addressing the question of why retail is a popular target for investor activists, Appel said, “The universe of retail is so large. There are numerous public companies accessible to analyze. You can just see how a company is performing against the S&P index. Since there are so many retailers that report…it’s possible to utilize the data, and there are assets on the balance sheet that can be better monetized or better managed.
“Retailers have suffered from a dearth of management talent,” Appel added. “There are issues out there, like management compensation, which is seen as excessive. Many retailers are late to adapt to technology. You also have the overarching situation that there is just too much retail square footage out there, a lot of management have not looked outward to see what is the right balance between digital and brick-and-mortar fleets. Very often you see boards defer to CEOs. Sometimes the boards have been handpicked by the CEO. In some cases, the boards don’t have enough industry knowledge.”
Retailers, Kniffen said, “are totally risk averse as a group” and often run by people that don’t know how to run retail. “It’s a very competitive business, way overstored, with lots of people doing the same things.”