How can investors with small stakes have such a large impact in
By STEVEN GRAY
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
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
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
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
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
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
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