A Pyrrhic Victory for J.C. Penney
My assumption is that J.C. Penney Co.’s board of directors isn’t familiar with King Pyrrhus. He was one of the greatest generals of antiquity and in 280-279 B.C. he defeated the Romans in battles at Lucania and Asculum (Southern Italy). The victories, however, came at an extraordinarily high price as he lost a substantial number of his best officers and soldiers. King Pyrrhus upon reflecting on his victory at Asculum is reported to have said: “One more such victory and we are lost.” Time will demonstrate that the recent resignation of activist investor William Ackman from J.C. Penney’s board (and well as the sale of his entire stock in J.C. Penney) is indeed nothing more than a Pyrrhic victory.
Ackman’s split with the company follows a contentious and public fight he had with other J.C. Penney board members regarding the direction of the company. Ackman publicly disclosed that he wanted to have fellow directors move quicker on the replacement of interim Chief Executive Myron “Mike” Ullman. In addition, he wanted to replace the board’s chairman, Tom Engibous. As a result of these unusual disclosures of boardroom discussions, Ackman came under heavy criticism from other Penney directors and outsiders.
Was Ackman out of line? Not in the least. At the time, Ackman’s Pershing Square Capital Management LP owned approximately 18% of J.C. Penney. He had a fiduciary duty to not only Pershing’s investors, but also, through his position as (then) director, to J.C. Penney’s shareholders. Of course, there was more than just a bit of irony in Ackman’s push to replace Ullman. After all, it was Ackman who led the recruitment of Apple stores leader Ron Johnson to replace Ullman as CEO, when he retired from J.C. Penney in 2011. Less than two years later, in a decision supported by Ackman, J.C. Penney terminated Johnson for his failure to turn the company around and brought back Ullman on an interim basis.
Notwithstanding the paradox of the situation, Ackman had a legitimate point. J.C. Penney is in dire circumstances and time is not a luxury for the company. J.C. Penney has been losing cash since 2008. A significant loss in its customer base and an overall decline in sales have resulted in the company’s shares plummeting 35% this year. The retailer recently had to secure a $1.75b loan through Goldman Sachs, and Citigroup recently downgraded the company after it found “no evidence of a turnaround in the works.” Ackman acutely summarized the situation when he said that J.C. Penney’s very existence is “at risk”
Despite recent headlines to the contrary, activist investors are not all “unscrupulous” individuals who make their fortunes on the backs of the hard-working masses. There is another story at play here which is often overlooked in favor of the Gordon Gekko “greed is good” narrative. It is the one in which these activist investors are actually pulling back the curtain on entrenched and unyielding boards and driving innovation in an effort to increase shareholder value. Often times, these are companies whose stocks have languished amidst a corporate culture lacking in both transparency and accountability.
Ackman is not the only activist investor facing criticism recently. Daniel Loeb, CEO of New York-based hedge fund Third Point, has come under fire for his battle with Sony. Loeb wants the Japanese company to spin-off its entertainment unit in an effort to free-up cash to revive its struggling electronics divisions. Third Point owns 7% of Sony – a company which has seen its dominance in the technology sector fall sharply over the past several years. Although Sony has rejected his demands, Loeb considers the confrontation a success as the company has agreed to greater financial disclosures from the entertainment unit.
Loeb’s clash with Sony comes on the heels of the successful and extremely lucrative deal he reached with Yahoo several weeks ago – after playing a critical role in the company’s turnaround, including the recruitment of CEO Marissa Mayer. Yahoo’s stock has risen more than 73% since Mayer’s arrival.
The willingness of investors such as Ackman and Loeb to take an active position in at-risk corporations is a critical component in today’s unstable markets. The substantive discussions that these individuals often provoke between a company’s board, management and shareholders, can serve as a catalyst for advancement. Unfortunately, for J.C. Penney, Ackman’s departure signals the end of this opportunity – and perhaps -- for the company.
Mark Rogers is a corporate governance expert and the CEO of BoardProspects.com.