Target Shareholders Say ‘No’ to Activist Investor
William Ackman,
head of Pershing Square Capital Management and activist investor, has wanted
to shake things up at Target. In the past year, he has pushed for the company
to sell its credit card operations, spin off its real estate assets and
forced a shareholder vote to expand Target’s board and elect directors
who shared his vision for the retailer’s future.
Unfortunately for Mr. Ackman,
he has not made the case for change with the majority of Target’s shareholders.
At the company’s annual meeting yesterday, shareholders voted to maintain
the board size at 12 instead of the 13 he sought. It also reelected four
incumbent board directors rather than those backed by Mr. Ackman.
“Today’s
outcome demonstrates the confidence Target shareholders have in our Board’s
qualifications, diversity and experience to provide effective and independent
oversight and direction to the company, contributing to the creation of
one of the most recognized brands in the United States,” said Gregg Steinhafel,
Target’s chairman, president and chief executive officer, in a press release.
“We remain dedicated to serving the interests of all shareholders by
sustaining Target’s competitive advantage, driving continued profitable growth
and generating substantial shareholder value over time.”
“I
believe that Target’s board has shown a strong purpose and direction, and
I think it would have been disruptive if Ackman would
have had these people,” Walter Loeb, a retail consultant, told The
Associated Press.
Discussion Questions:
What do you think of the vote by Target shareholders to side with the
company’s board over William Ackman? In general,
are activist investors such as Mr. Ackman a
positive or negative force when it comes to the long-term health of the
companies they invest in?
Despite some bumps in the road–some caused by the economy, others triggered by some management decisions–most observers agree that Target is one of the best-run companies in retail. There has been tremendous management continuity over the years as well as a strong focus on store experience, brand positioning and merchandise content. The team running Target (including the board of directors) has earned the chance to continue making strategic changes to the formula as they see fit.
Meanwhile, Mr. Ackman’s “vision” for Target’s future has less to do with running a fundamentally sound retailer, and more to do with the sorts of financial “plays” that drove Mervyns into the ground and cost Sears a lot of market share. I applaud Target’s shareholders for doing the right thing.
It’s easy to side with the Board, simply because Target seems to be doing well, and why fix what ain’t broke. On the other hand, complacency is not a good strategy. So it would be shortsighted not to consider the recommendations that Mr. Ackman made and evaluate them independently.
Target and other retailers have to stay on top of their game as the economy shifts and morphs into something we have yet to encounter. People with vision are necessary to keep retailers ahead of the curve. I have no idea if Mr. Ackman is one of those people. But I think the Board showed its shareholders that they are willing to back what they feel will be successful in the long run rather than what could bring short term gains. That’s wise for now.
If the Board starts to evaluate visionary opportunities for future growth and communicates that with shareholders, shareholders will continue to have the Board’s back and reap the benefits of effective strategies.
There are still so many good things about Target despite its more recent slippage. And 70% of the shareholders stuck with them yesterday. Mr. Ackerman wants to change the flavor of Target’s corporate stew as only a Hedge Fund manager can. Sears/Kmart hasn’t become a retailing giant under its Hedge Fund manager’s guidance (and meddling) and most Target shareholders apparently feel Mr. Ackerman is not the answer to Target’s growth needs. Nonetheless, the pressure is now on Target to speed up its game plan and improve itself against Wal-Mart’s onslaught.
You know, I am a huge fan of Target, and even so I do feel like they’ve lost their way a bit. The price points in their stores are moving upward at a time when people are watching every penny, helped along by some brand alliances that resulted in more expensive merchandise in stores. But the things that Ackman is pushing for aren’t the things that are the issue or will fix it, in my mind. They seem more designed to gut the company for a quick buck, and that would be a huge shame. Personally, I’m glad he got trounced. And to Target’s credit, their most recent ad campaigns seem to show that they recognize the issue with “value” messaging, and are getting back to what’s resonating with the new spending mentality out there.
Activist investors can be a very positive force–especially in static, troubled companies where it wouldn’t hurt to shake up the board. But Target is not really one of them. It’s a great company that’s simply been caught up in a recession that’s hurt them and helped Walmart. Mr. Ackman’s proposals are not outrageous but timing is everything. Now would not be a good time to divest real estate and adopt a sale leaseback strategy. The time for that was 3 years ago. Maybe it will be a good strategy 3 years from now–but not now.
Selling off credit card operations is still a good idea. They could use the cash elsewhere and selling off the operation might insulate them from massive credit card defaults that are coming down the road. Target has to take a hard look at where it wants be and what its customers want it to be in the future. A grocery store? I don’t think so!
Does Target need a shakeup? Aside from some questionable merchandising directions, I think they are pretty steady over there. I would be interested to hear what ideas he has to actually ‘shake things up’. Most of the ‘shakeups’ have resulted in shake-outs.
I believe the Target shareholders got it right on this one. As a hedge fund manager of note, Mr. Ackman’s interest is surely short term gain and not the long term sustainability of the company. As an upscale alternative to Walmart, Target plays in a tough segment and has done pretty well. Their move to take a larger share of the upscale market that’s trading down by bringing in product with higher price points in some areas is hurting them a bit at this point, but I like the idea of it long term.
Getting more in the cart of the customer already in the store is easier and more cost effective than attracting someone new. They’ve definitely proven they can attract that customer and keep them over time better than Walmart. Keeping a little bit above the Walmart look-alike fray is smart as well.
I don’t know enough about the specifics at Target, but as we watch the slow (hopefully temporary) demise of private enterprise in the auto and financial industries we have to ask ourselves “What has gone wrong with corporate governance?”
As stockholders, we are owners of the enterprises we invest in and are responsible to ourselves for making sure the companies we have put our savings into are successful. Yet, I imagine like most other investors, I routinely check off the management recommendations for the Board, either directly on the proxy statement or indirectly through the mutual funds or ETF’s that hold my savings. The issue is what economists would call “asymmetric information”. Basically, stockholders feel too ignorant to do anything else. Mutual fund and ETF managers should have their investor’s interests in mind, but too often they are more interested in additional financial business from the corporations so are also hesitant to buck management recommendations.
I don’t like government involvement in free enterprise, but even Ultimate Fighting has rules. Lavish expense accounts and outrages salaries are coming directly from the dividends that should be passed on to stockholders. Bondholders and preferred stockholders have contracted returns on their investments. It is the common stockholders who suffer when management spends money on themselves. I understand this is not what happened at Target, but there are many meritorious efforts by stockholders which never even see the light of day.
I don’t want the government setting executive pay or monitoring corporate expenses, but there must be better reporting rules that reduce the impact of the asymmetric information and make shareholders active participants in their company’s outcomes. Maybe this could be done by requiring companies to normalize their annual reports, using a common chart of accounts within various industries, and comparing their own executive compensation and expenses to others in the same industry.
Target has been too “feel goody” over the past few years promoting diversity and donating money to charity. They have been more about good corporate citizenship than separating as much money from consumer’s pockets and putting it in the pockets of shareholders.
I can’t say one way or the other which is the best route to go. It’s a personal decision but I think if you are looking at making money on Target stock, there are probably better alternatives. Some big shareholders are too eager to get their money back and it looks like they will have to wait awhile.
I’ve been around target management and operations since the early 70s and can attest for their professionalism, dedication and vision for over 30+ years. Target has re-written the book in combining class with mass that no other retailer can emulate, either now or in the future.
However as a loyal Target guest, I am troubled by the following that I experience in my weekly visits:
1. Horrible out of stocks in HBA/Cosmetics, along with other frequently shopped consumer categories. Too many lost sales possibly driving consumers into Walmart where out of stocks are never a major issue. I’ve actually observed Target customers get frustrated in not being able to find normally stocked planogram items and leave.
2. Too much emphasis on control label brands. Think A&P of the early 60s-70s. Consumers still want branded goods especially in apparel and can shop department stores using the numerous coupons/markdowns, etc, constantly being offered to save lots of money on designer goods.
3. Inconsistent sales help to assist and or answer questions.
Hopefully Target can address these issues and continue to not only retain their existing guests but also obtain new ones.
It is very rare for a challenger to the Board of Directors of a company to win in a shareholder vote. Most stockholders, even institutional holders simply vote for the current board and the current strategy. Unfortunately, stockholders tend not to take a real interest in the businesses they own. Consider the vote on the HP/Compaq deal. Even with the founding family against a deal that made little or no sense at all, the herd of stockholders followed the recommendation of the Board.
In the Target case, there would have been very little downside to elect even all of Mr. Ackman’s candidates. That would have at most given Mr. Ackman control of no more than one-third of the Board. The current Board’s obvious position did not want any challenges at all. That attitude is a prescription for failure.
Because activist shareholders are rarely able to get beyond a minority position, they rarely are able to make much impact. Over the last 30-years, several attempts have been made by activist shareholders in the U.S. auto industry. Unfortunately, their impact has been nil.
I teach Change Management to international MBA candidates. One of he exercises we do is to look at the companies that have been dropped from the Dow-Jones Industrial Index in the last 110 years. Upon being chosen to be a member company these are supposed to be premier companies–supposedly with great resources and great management. Yet, except for GE, most have failed. They failed, not because technology and the times passed them by. They failed because they doggedly followed the status quo with little vision or even an antipathy for change. Most of those companies that failed had the resources to continue to grow and even control markets in a changing world. What they had to do was change, not when things turned down but when they were at their peak. In the retail segment, could Woolworth have become Walmart? Could Sears have become Home Depot? Why did they not?
“I don’t know enough about the specifics at Target, but as we watch the slow (hopefully temporary) demise of private enterprise in the auto and financial industries we have to ask ourselves ‘What has gone wrong with corporate governance?’” Bill, I hear you, and I ask myself that every day. Beyond corporate management paying themselves before shareholders, when we have super-shareholders looking for super-sized returns in 90 days or less–beyond what the business model of the core products and services can generate–we’ve got problems. And that search for those returns is my understanding of the modern hedge-fund manager’s job.
So while on the surface I might approve of this shareholder’s suggestions that Target examine its real-estate and credit-card businesses as being too far from its knitting, as the late chairman of Maritz Inc., used to call it, I am deeply suspicious of the motives of anyone coming out of that culture in this period in history. Far better that Target should stick to its long-term strategy of helping upscale shoppers trade down. And filling the basket of customers who are already in the store. More cost-effective than going out and getting new customers? Mmmm hmm. By a factor of 5.
Recessions–even this one–don’t last even two years. Japanese corporations plan for 99. (I notice their car companies have taken a hit in this recession. But they’re not in bankruptcy.) And before we attribute the difference in management styles to something intrinsic to Asian culture, let’s remember that they learned to manage like this from a guy who developed his methods in a Piggly Wiggly. I forget. What industry were they in? 😉
It would be interesting to know the percentage of vote on both sides done by proxy. There is the possibility that the vote was done by ‘default’ rather than an ‘active’ vote of 70% of shareholders. Beyond that point of interest, a vote is a vote.
The real question is what happens to performance going forward and will the challenger remain a challenger. Thus, a one time fight. If it’s that, the current klan may be safe. If not, they just might have their work cut out for them should performance continue to decline in the wake of recovery. There is nothing to accurately measure their current position being solely attributable to the economic climate only. What percentage of decline can be accurately measured to consumer disappointment. Some might make the argument that consumer disappointment in the wake of economic decisions might simply continue upon recovery. Once you’ve found you can do without, you just might continue to do so and not return. That in itself is their major competitor’s advantage.
Once consumers have made a decision to leave, it’s harder than ever to get them to return no matter how thick the wallet. If they’ve left because you haven’t met their needs, what says they believe you can simply because you can spend more when they’ve been buying for less? They are being trained to spend less, expect less, and what is that slogan now? Hmmm….Live better?
Activist shareholders can be a negative force in many cases. But sometimes friction is needed to move forward. Stirring the pot can often be good for companies, especially when management appears to have lost its way and is clearly heading down the wrong path.
Superficially this seems like one of those outcomes that should put a smile on everyone’s face (well almost everyone): solid company tells busy-body HF manager, and his “all that matters is the next 6 mos” cohorts to take a hike; and I don’t have anything specific to argue otherwise (even if I wanted to). But that having been said, I recall reading an article a few years back (when the Dept Store Div was sold off and Dayton Hudson became Target) that worried the company might suffer from divorcing itself from its heritage, the implication being that the (presumably more sophisticated) DS presence was what gave Target its “chic.” Hmmmmm