The Association of U S West Retirees



Gadflies Get Respect, and Not Just at Home Depot
By Charles Duhigg
New York Times
Friday, January 5, 2007

For decades, activist shareholders were an entertaining, but largely ignored, Wall Street sideshow.  Disgruntled investors would attend annual meetings to harangue executives, criticize strategies — and protest that their complaints were being ignored.  One agitator appeared in face paint and a red nose after executives called him a clown.

Today, however, it seems that activists have captured the center ring and are directing the main event.

On Wednesday, shareholder advocates could claim one of their biggest prizes yet when Home Depot announced the resignation of its chairman and chief executive, Robert L. Nardelli, long a target of shareholder ire for his large compensation and the company’s flagging stock price.

The main investor who pressed for the overthrow at Home Depot might at first glance seem an unlikely rebel:  Ralph V. Whitworth, a lawyer educated at Georgetown and a former campaign worker for President Ronald Reagan who in December announced he had bought about $1 billion of the retailer’s stock, or a 1.2 percent stake, through his fund, Relational Investors.

But the rapid success of Mr. Whitworth’s campaign against the management and strategy of Home Depot demonstrates how thoroughly activists have moved into Wall Street’s inner sanctum.  Mr. Whitworth has said he still intended to nominate himself and at least one other candidate to Home Depot’s board at its shareholder meeting in the spring.

“There’s a lot more respect for investors like me now,” said Mr. Whitworth, 51.  “I still have to make threats, but now everyone wants to deal with us fast.  They realize we’ve got real power and we’re here to stay. ”

The shake-up at Home Depot may be just a taste of things to come as shareholders and management at a number of companies, including Brink’s, the Borders Group and Applebee's International, square off for battle at annual meetings this spring.

As those fights begin, expect few clown noses.

“Activist shareholders have a power and audience beyond what they’ve ever enjoyed,” said Howard Steinberg, a lawyer who advises corporate boards and deal makers.  “They’re developing a credible track record, and as a result, more and more managers are forced to engage with them.  Activists’ time has come.”

Since July, activists have pressed successfully to push out chief executives at Pfizer and Sovereign Bank.  Institutional investors and mutual funds have set aside hundreds of millions of dollars to invest in underperforming companies with the intention of demanding new board seats or alternative strategies.

Much of that newfound influence is owed to recent legal changes and heightened attention to issues like executive compensation.  But it also draws on the fact that many activists have now amassed the wealth, knowledge and networks critical for success.

“For years these guys were seen as politically motivated oddballs or annoying attention seekers,” said Nell Minow, editor of the Corporate Library, a research group that rates corporate governance practices.  “Now some of those same people control hundreds of millions of dollars and have been around longer than many CEO’s”

Before the 1980s, much shareholder activism was directed by ideological agitators, including unions, religious organizations and populist figures like Ralph Nader, who bought shares in companies as platforms for urging social, environmental or political changes.

The United Shareholders Associations, which Mr. Whitworth helped found in 1986 with the corporate raider Boone Pickens, was one of the first major efforts to organize shareholder activists around profit-minded goals.

Every spring the group would select about 50 companies and begin asking embarrassing questions at shareholder meetings.  In 1993, the last year of the group’s operation, 25 of 43 of the companies, including IBM, reached agreements with Mr. Whitworth.

“The head of General Mills once called me a socialist,” Mr. Whitworth said in an interview.  “I told him I was the ultimate capitalist.  Business people would return my calls for the first time, and it was giving me an entree into a world I otherwise couldn’t access.”

Foremost among the goals successfully sought by United Shareholders were regulatory changes that made it possible for dissidents to nominate only one or two directors to a board, rather than an entire slate.

By the mid-1990s, corporate raiders realized the rule offered a less expensive way to stage a takeover rather than buying a company outright.  When the California Public Employees’ Retirement System began looking for a fund that would use activism to increase returns in 1996, Mr. Whitworth and a colleague, David H. Batchelder, founded Relational Investors.

The fund today oversees about $7 billion, all invested in only nine companies that are chosen with an eye toward activist intervention.  In most cases, Mr. Whitworth forces his way onto a company’s board, either by threatening or staging a proxy fight.  Investors say the fund has averaged a return of about 25 percent annually over the last nine years.

Activist shareholders like Relational were further aided by changes in the law.  In particular, they say that regulations passed in 2004 requiring money managers and mutual funds to disclose how they vote in proxy elections have forced once-passive managers to become activists.

“There was a sense before that mutual funds in particular just voted with management,” said Ann Yerger, executive director of the Council of Institutional Investors.  “But post-Enron and Tyco, investors expect money managers to justify their votes now, and to be listening to anyone warning about dangers.”

Moreover, money managers and hedge funds are beginning to advertise their activist intentions, bragging that aggressiveness gives them an edge.  In November, the noted investor Robert A. Olstein announced formation of an activist fund.

“We want to have an edge,” said Eric R. Heyman, co-manager of the new Olstein Strategic Opportunities Fund.  “Our skill is approaching companies and persuading management to adopt certain decisions, sometimes aggressively, and that’s why people invest with us.”

Another important shift is a court ruling last year making it easier for shareholders to challenge directors nominated by companies.

“Shareholders’ toolboxes are getting more and more robust every year,” said Ms. Minow of the Corporate Library.

Moreover, as the number of activist investors grows, a vast ad hoc network has formed that makes it more difficult for companies to win a fight.  The universe of activist investors has expanded to include hedge funds like Pirate Capital, which is fighting to add its executives to the board of the security company Brink’s, and investors like Carl C. Icahn, who failed to gain board seats after a public spat with Time Warner's chief executive, Richard D. Parsons.

When two activist investors, Pershing Square Capital Management and Nelson Peltz, bought large amounts of stock in Wendy's International in 2005, many other like-minded buyers jumped in, according to analysts.

As a result, the board had no choice but to accept activists’ suggestions, said James V. Pickett, Wendy’s chairman.  Ultimately, three representatives of Mr. Peltz’s fund joined the board.

“Most of the issues the activists raised at Wendy’s were things we were already dealing with,” Mr. Pickett said.  “They just increased the intensity.  But when they own that much of the company, you have to listen to them even if you don’t want to.”

For Mr. Whitworth, who has grown so wealthy that he once gave a charity $1 million in exchange for Paul McCartney’s playing at his wife’s 50th birthday party, that kind of access has increased his effectiveness, he says.

After forcing his way onto the board of Mattel, Mr. Whitworth was given a gold-plated Barbie in appreciation by other directors when he left.

But such shifts have also increased his ambitions.

“I was a firebrand;  now I’ve mellowed a lot,” he said.  “But I’m still young.  I look forward to helping a lot more companies become more efficient, whether they like it or not.”