The Association of U S West Retirees



Bigger Than They Look
How can investors with small stakes have such a large impact in proxy fights?
The Wall Street Journal
Monday, October 9, 2006

In August, after H.J. Heinz Co.'s annual meeting, billionaire investor Nelson Peltz breezed through the Pittsburgh Hilton declaring victory.  Following a grueling, often personal six-month campaign, his Trian Fund Management LP was poised to win two seats on the company's board.  "Any seat is a victory," boasted Mr. Peltz, who initially sought directorships for himself and four colleagues.

The board seats were just part of his victory.  With only a 5.5% stake in the world's largest ketchup maker, Mr. Peltz had engineered one of the year's most high-profile proxy battles, boosted Heinz's stock price and pressured the company to cut costs significantly.

More broadly, though, Mr. Peltz's success at Heinz, a company with a market capitalization of about $14 billion, reflects a new reality in American business:  Investors no longer need huge stakes to bring about significant corporate change.

"This is a milestone proxy fight, and if a company with a market cap like Heinz can lose a proxy fight, who's next?" says Chris Young, director of U.S. research at Institutional Shareholder Services Inc., a Rockville, Md., firm that advises shareholders on how to vote in proxy fights.

There are two main factors behind the growing success of investors with relatively small stakes in shaping corporate policy.  One is the Sarbanes-Oxley regulations shaped in the wake of recent corporate scandals.  Those regulations hold boards more accountable for a company's performance, so the directors are more willing to listen to the ideas of a range of investors -- including those who previously were dismissed as renegades out purely for short-term gains.

It used to be that many more corporate managers rebuffed activist investors, saying, " 'You're not going to tell me what to do,' " says Jon Lukomnik, managing partner of Sinclair Capital LLC, a New York-based strategic consulting firm to large companies and institutional investors.  "That feeling is dying.  There's the feeling that they can't get away with ignoring activist investors, that sometimes, the activist investors are right."

Meanwhile, hedge funds have become more aggressive in their efforts to drive up companies' share prices, as investors search for better returns in a lackluster stock market.  With management more receptive than ever and shareholders more willing than ever to push their agendas, more investors with small stakes are winning proxy fights.

FactSet Research Systems Inc., a Norwalk, Conn., financial-analysis firm, estimates there have been 92 proxy contests so far in 2006, more than double the 39 in all of 2004.  Of this year's proxy fights, 54 have been driven by dissident investors with less than a 10% stake, and 15 of those were led by investors holding less than 5%, according to FactSet.  For those 54, the success rate was 61%, the research firm says, including a 27% success rate for investors holding stakes of less than 5%.

Corporate-governance experts say the trend is likely to persist, largely because investors are increasingly impressed with the improved performance at companies like Wendy's International Inc., in which Trian owns a 6.9% stake.  Trian pushed through several operational shifts at Wendy's last year and gained three seats on the company's board.  The company's stock price has steadily improved since Mr. Peltz prodded Wendy's to fully spin off its Tim Hortons unit, a coffee-and-doughnut chain based in Canada.

Other successful proxy fights have been in the news recently, including the pressure put on South Korean cigarette maker KT&G Corp. by New York investors Carl Icahn and Warren Lichtenstein to raise the company's dividend and buy back shares -- a victory achieved with a combined stake of less than 8% in the company.

Activist investors tend to carefully analyze companies before seizing a stake.  Sometimes, after making an investment, these investors disclose their stakes and intentions through private meetings with senior management, with little fanfare.  Other times, they make such disclosures through news releases, or through filings with the Securities and Exchange Commission.  (Any stake of more than 5% in a company must be reported to the SEC.)

In the Heinz battle, company executives first heard rumors that Mr. Peltz was astir in February.  In early March, his firm disclosed it had gained a 5.5% stake in the company, triggering a campaign in which Heinz says it spent some $14 million to resist Mr. Peltz.  (Trian declines to disclose how much it spent in the Heinz proxy contest.)  Heinz executives and board members crisscrossed the country meeting with top investors, and the company took out ads in major newspapers defending its position.

Mr. Peltz criticized Heinz's performance during the eight-year tenure of Chief Executive William Johnson, and suggested the company consider dumping its noncore brands, including its Italian baby-food business.  Mr. Peltz also suggested Heinz cut costs by $575 million and increase spending on marketing core products, particularly ketchup.  Mr. Johnson dismissed Trian's proposals as too extreme.  Yet, in June, he introduced a similar plan, pledging to cut costs by $355 million and increase marketing spending by 19% during the fiscal year that began May 4.

For much of the summer, both camps visited Heinz's top shareholders in an attempt to gain their confidence.  Institutional Shareholder Services, meanwhile, recommended that three of Trian's nominees -- Mr. Peltz, professional golfer Greg Norman and Michael F. Weinstein, chairman of INOV8 Beverage Co. -- be elected to Heinz's board.  In the end, Mr. Peltz and Mr. Weinstein were elected.

Corporate-governance experts worry that activist investors in some cases may force boards and senior management to think short-term, to appease a narrow slice of the shareholder base, rather than developing a long-term view about what is best for the company.

Mr. Peltz hasn't been a board member at Heinz long enough to completely extinguish such concerns, but he has said that Trian has "no intention" of selling its stake in Heinz and will push hard for more changes to improve the company's performance.  "We'll hold management's feet to the fire," he says.

To successfully push his agenda, though, Mr. Peltz may have to alter his approach at least a bit.  He will have to quickly defuse tensions emanating from Heinz board members who have publicly expressed concern that Mr. Peltz's aggressive style will turn board meetings into dysfunctional affairs.  One food-industry analyst has speculated that Mr. Peltz's arrival will lead some Heinz directors to resign.  And other experts have warned that prospective directors would be reluctant to join an acrimonious board.  "Boards act through consensus, and even when you have one dissident board member, that makes a difference," says Henry Hu, professor of corporate and securities law at the University of Texas law school.

--Mr. Gray is a staff reporter in The Wall Street Journal's Chicago bureau.

Write to Steven Gray at