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Dec 19, 2013

Winning over the board at Timken

CalSTRS will continue to push for split of chairman, CEO roles and expects stock to achieve true valuation by summer 2014

At global steel company Timken’s annual meeting in May, a proposal by pension fund CalSTRS and activist investment fund Relational Investors to split the company into separate steel and bearings businesses got the support of 53 percent of shareholder votes cast. To its credit, the board swiftly appointed a strategic special committee to find facts and recommend action. Corporate Secretary spoke with Anne Sheehan, CalSTRS’ director of corporate governance, after Timken’s announcement to split the company in September.     

Timken plans to separate the CEO and chairman roles at the new bearings company but not at the new steel firm. Will CalSTRS push the board to split the chair and CEO roles at the latter company?

We like a separate chair and CEO role across all our portfolio firms. It’s a better leadership structure. There can be conflicts in the role of CEO and the chairman of the board as you’re sort of overseeing yourself. We’ll continue to work with the board on governance.

Do you have a time frame in mind for when the stock prices of the new companies should more accurately reflect their true value?

Sometime next summer is probably when you will see those share prices settle down into what we think is the true valuation. Timken has a lot of decisions to make on capital allocation for each of the companies and how they handle some of these issues. Those will be the unknowns that will settle as the company gets closer to the actual split.

Will you have input on capital allocation decisions?

We’ll continue to chat with the company on capital allocation. We had some discussions, and Relational did a little more of the work on that. In some of our presentations there were efforts to ensure the firm’s pension plans were both fully funded, and we were pleased with the decision on that. We’ll continue to monitor Timken’s capital allocation as it’s important to us.

Was the board initially not receptive to your proposal?

No, it wasn’t. It felt the companies could continue to operate together, that the market and the Street just didn’t understand, and that it could just explain its longer-term strategy. That’s why I compliment the work the members of the independent committee did, because they went out and heard from the shareholders and from the analysts who follow this stock that they’d do better to reflect the true value of each part of the company if those parts were spun off. But the board was reluctant. The company has been around a long time in Ohio, and it has done a very good job. The board thought everything was humming along fine, and it had other reasons why it felt the Street was discounting the company’s stock.

But through the independent committee’s visits, the company began to realize that perhaps this was a good move. It’s a well-run company. It has made good capital investments in its plants, and we think that will continue in both independently run companies.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary