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
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
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
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
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
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
“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
“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