June 1, 2015

The Lessons of DuPont: Corporate Governance For Dummies

John C. Coffee, Jr. | The CLS Blue Sky Blog - Columbia Law School

“Among practitioners, it is a customary cliché to say that all proxy contests—just like all trials—are unique and idiosyncratic. There is some truth to that easy generalization, but it also misses the forest for the trees. Some obvious truths stand out in the recent battle between Trian Fund Management and DuPont that will apply to future contests:

1. What explains DuPont’s Victory? DuPont won only a narrow victory, despite enormous advantages. Press accounts have reported that DuPont won 52% of the vote. This close margin may seem surprising, given (1) DuPont’s very large market capitalization (over $68 billion), (2) DuPont’s very successful recent performance (it has beaten the return on the S&P 500 index for a number of years); and (3) DuPont’s large retail ownership (over 30%, which shareholders usually support management). Add to this the further fact that DuPont’s CEO (Ellen Kullman) ably portrayed herself an “agent of change,” responsive to shareholder concerns, rather that the defender of a Maginot Line. Early on, she agreed to spin off DuPont’s major chemical division (now called Chemours). Finally, Trian Fund did not own that much stock (only about 2.7%). All in all, this was the largest public company ever subjected to a proxy fight for board seats. Hence, the question lingers: given DuPont’s size, success, and flexibility, and the absence of any “wolf pack” with a sizeable stake, why was the margin of victory so close?

One answer has to be that the governance professionals at pension funds and mutual funds now favor (or at least are open to) the idea of a divided, factionalized board. Putting Nelson Petz on DuPont’s board struck many of them as a low-cost means, with little downside risk, of keeping DuPont “in play” and signaling the shareholders’ desire for more spinoffs and less investment in long-term capital projects, including research and development. Consistent with this attitude, two new studies this year show that activists have achieved over 75% success in recent proxy contests, electing at least one director.[1] Indeed, the odds are so stacked in favor of activist investors who run a “short slate” of director nominees that the number of proxy contests has recently fallen. Why? Managements would much rather negotiate with activists over the identities of their nominees (and the size of any stock buyback) than become involved in a hostile fight that they are likely to lose. The activists may obtain a little less in these negotiations than they would win in a proxy fight, but they correspondingly save the $10 million or so in expenses that the proxy contest would cost them. As a result, both sides would rather settle and increasingly do so. Even Martin Lipton, the staunchest of the critics of shareholder activism, has recognized in a recent memo to his clients that if you can’t beat them, you need to join them.[2] ”

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