Lessons other boards can learn from such moves.
An investor group with a 5% stake in Bed, Bath & Beyond is looking to oust the entire company's board.
The “magnitude of value destruction necessitates wholesale board and leadership changes,” said investors Legion Partners Asset Management, Macellum Advisors and Ancora Advisors in a statement released earlier this week.
It went on to state that the “deeply entrenched board lacking retail experience is an impediment to serving shareholder interests. Average director tenure is approximately 19 years and the lack of retail expertise and stale perspectives on the board have hindered proper oversight of the management team.”
In its own statement, Bed, Bath & Beyond countered that the investors were negotiating in bad faith:
“We made clear our commitment to engaging constructively and acting in the best interest of all Bed Bath & Beyond shareholders. We asked on several occasions for their suggestions and ideas for improving the company's business but they did not provide any. We also invited them to participate in the board refreshment program we have been undertaking in recent years and are in the process of accelerating with investor input. Instead they chose to publicly attack the company and provide their intent to nominate directors to take over the full board. Unfortunately, while our directors and management were seeking to engage in good faith, it appears that the Legion and Macellum representatives were merely seeking information to support their attack.”
The call to replace an entire board is not unprecedented.
In 2014, activist investor Starboard Value called for the ouster of the entire board of Darden Restaurants, which owns Olive Garden and Red Lobster, explains Ted Gavin, managing director and founding partner of restructuring consultancy Gavin/Solmonese. “It was part of a year-long public proxy fight that included a nearly 300-page presentation on why they felt the board needed to be replaced, which was released publicly.”
Starboard, he adds, “was successful in its efforts.”
Clearly such moves pass legal muster.
“Assuming that the bylaws allow for it, a shareholder can propose new board members and call for a vote at the next meeting of shareholders,” Gavin says. “Sometimes you can propose a whole new slate, sometimes you can only propose a portion of the board but, once they are in place, they can use whatever procedural mechanism exists to propose replacement of other board members. Shareholders own the company, so bylaws tend to give them wide latitude and broad abilities to control the membership of the board.”
So what are the lessons directors can take from such moves?
Gavin provides some takeaways:
- Remember who you work for – shareholders. All of them. Being responsive to, and being willing to work with, activist investors is part of the job.
- When the activists are being unreasonable, remember their goal – to maximize their share value. That leaves three opportunities for boards to consider: beat them (fight off their proxy battle and win), concede (let them replace some number of board seats), or flip the chessboard over (take the company private or buy the investors shares back at a healthy profit for the investors).
- When exercising one's board responsibilities, always remember that, in a public fight, almost anything a board does can be viewed in a negative light against the backdrop of a business that isn't performing as someone, like an activist investor, thinks it should be performing. The board will be judged by these actions. Act accordingly.
- This is where public affairs and business management collide. Get the right talent to advise you and help strategize, or you'll soon have a lot more free time to think about what you should have done
Bed, Bath & Beyond’s leadership is making a case for the board. The company statement adds:
“Bed Bath & Beyond has a diverse, experienced board of directors that is committed to acting in the best interest of all shareholders and supporting the company's strategic priorities. The board includes 12 highly qualified directors, all of whom are actively engaged and possess significant experience relevant to our business.
“The board recognizes the value of fresh perspectives and diversity in the boardroom and regularly evaluates its composition to ensure it reflects the right mix of skills and expertise. Notably, as part of the board's ongoing refreshment program, three new independent directors with relevant experience have been added during the last two years: Virginia Ruesterholz, JB Osborne and Stephanie Bell-Rose, and currently one-third of Bed Bath & Beyond's directors are diverse. Importantly, the Board has stated its ongoing commitment to further board refreshment as well as adoption of best-in-class governance and compensation practices.”