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Oct 12, 2015

What's behind DuPont's management shake-up?

Even when a company seems to have done everything right in responding to an activist investor, the board may decide a big change is needed

There would appear to be limits to how effective shareholder engagement can be, judging by the unexpected news from DuPont on October 5 that chair and CEO Ellen Kullman will retire this month, to be replaced temporarily by Edward Breen, former chair and CEO of Tyco International, who presided over the conglomerate’s breakup into five separate firms.

It’s an intriguing turn of events. Breen joined DuPont’s board just nine months ago as the crop and chemicals company was embroiled in a proxy contest with activist hedge fund Trian Fund Management. Trian’s demands included DuPont’s own breakup and the election of four of Trian’s affiliates, including founding partner and CEO Nelson Peltz, to DuPont’s board. It’s an abrupt departure for Kullman, who’s only 59 and whose distinguished 27-year career at DuPont has been capped by her six years at the company’s helm. While Kullman received credit for her role in fending off Trian’s attack – shareholders voted to re-elect all 12 of the DuPont-nominated board members – the proxy battle reportedly cost DuPont $15 million, which could not have sat well with many of its shareholders.

Kullman’s departure reduces the likelihood of Peltz launching another proxy contest next year, according to a major DuPont investor who asked to remain anonymous, as reported by Reuters. The investor suggested the board had a hand in the retirement decision, having probably ‘continued to press Peltz’s concerns about underperformance.’
From the detailed account of Trian’s campaign provided in its proxy statement, DuPont seems to have made all the right moves in responding to the hedge fund’s many white papers recommending a breakup of the company’s business units and issuing ultimatums that included installing first one, and eventually four, Trian nominees on DuPont’s board. The company said its many efforts to engage constructively with Trian included more than 20 conversations with Trian’s team, more than half of which involved DuPont’s independent lead director. DuPont also conducted consecutive quarterly update calls to discuss earnings and ongoing developments since Trian’s investment and dedicated time at multiple board meetings to discuss, analyze and vote on Trian’s proposals.
The National Association of Corporate Directors, in the recently released results of its 2015-2016 public company governance survey, reports that less than half (44 percent) of respondents from 1,034 companies say a member of their board met with institutional investors in the past year, virtually unchanged from 2014 when that figure was 43 percent. And while as many as 20 percent of respondents say their boards have been approached by an activist investor in the past year, 46 percent say they don’t have a plan to respond to such a challenge.
There’s not necessarily a high correlation between how many boards have a member who has directly communicated with investors and levels of board preparedness for an activist investor’s challenge, says Mark Rogers, founder and CEO of BoardProspects, an online boardroom community with 10,000 members from 70 countries, whose educational, networking and recruitment opportunities have been compared with those on LinkedIn. ‘It depends on the approach [board members] have to activist investors,’ he says.
Rogers agrees that Trian is much less likely to mount another campaign with Kullman out of the picture. ‘Peltz isn’t a quiet one,’ he says. ‘He made it very clear to DuPont that he was going to come back unless there were changes and the board figured this guy isn’t going away so we’d better make some changes, because these campaigns take a lot out of the company in effort and manpower, especially for the board.’ By his estimate, the number of hours DuPont’s board put in over the last year was well beyond the average 240 as a result of deliberations about Trian’s proposals.
DuPont’s board likely realized it wasn’t only Trian that identified problems with DuPont’s corporate structure, but a lot of other institutional investors as well, Rogers adds. He believes the board will use Kullman’s retirement as a negotiating tactic. ‘It’s a signal not only to Trian but to the other investors, saying, We’re willing to make changes here. We know there were some problems brought about as a result of the activist investor campaign last year and we’re going to be more responsive and more open to evolving and listening to some of the things we need to do.’