Under chief executive officer Ellen Kullman, a company veteran, DuPont has tried to move away from lower-margin, cyclical-commodity chemicals businesses toward higher-growth, higher-margin business such as agricultural products. In the course of this, however, the company has repeatedly missed or lowered its earnings targets, so that 2015 earnings per share are slated to come in below 2011 levels, as have EPS in each of the prior three years.Prashanth Vishwanathan/Bloomberg
The letter from DuPont starts, in large capital letters, "Your vote is important, no matter how many or how few shares you own."
They mean it. I own just 100 shares in the company, acquired in August, 2011. Those 100 shares, however, have merited at least half a dozen phone calls from the solicitation firm DuPont has hired to help it win a proxy battle with Trian Group, the investment vehicle of activist investor Nelson Peltz.
Mr. Peltz, who started building his DuPont stake in March, 2013, wants to place four directors, including himself, on the company's board. The proxy contest is the culmination of nearly two years of attempts by Mr. Peltz to offer a plan for increasing returns at DuPont, a plan that's been resisted by DuPont's board, apparently because it doesn't want Mr. Peltz or his Trian colleagues to join them in the boardroom.
The proxy contest is the kind of "bare-knuckled, United States-style activist investing," to quote a contributor to the New York Times DealBook, thought to be coming to Canada in the wake of Bill Ackman's assault on the leadership of Canadian Pacific Railway, which he won in May, 2012. But three years later, things here have retained the patina of Canadian politeness.
"There is no question that CP catalyzed the shareholder democracy movement in Canada," says Patricia Olasker at Davies Ward Phillips & Vineberg LLP, who represented Mr. Ackman's Pershing Square fund in the CP matter. While we may not have since seen campaigns on the scale of Pershing Square, "we have seen and continue to see shareholder engagement with companies become more commonplace and settlements involving board seats, and operating or governance changes replace fight-to-the-finish proxy contests."
It seems a fight to the finish is what we will have at DuPont, legally known as E.I. du Pont de Nemours and Co. Under chief executive officer Ellen Kullman, a company veteran, DuPont has tried to move away from lower-margin, cyclical-commodity chemicals businesses toward higher-growth, higher-margin business such as agricultural products. In the course of this, however, the company has repeatedly missed or lowered its earnings targets, so that 2015 earnings per share are slated to come in below 2011 levels, as have EPS in each of the prior three years.
This is one of Trian's core arguments, as set out in the pile of materials that it has mailed to me since late March. Trian also points to an expensive 2011 acquisition of food-ingredients company Danisco, which has seen its growth and margins decline since DuPont bought it. And Trian says DuPont sold its performance coatings business for about $4-billion (U.S.) in 2013, far too little, because it now has an enterprise value – market capitalization plus net debt – of more than $10-billion as NYSE-traded Axalta Coating Systems Ltd.
There's even a personal element to the campaign: Trian, which owns $1.8-billion worth of DuPont shares, centred an April 9 letter to DuPont shareholders on the fact that Ms. Kullman exercised stock options and sold $80-million worth of stock, netting $49-million, at prices of $72 or less after Trian's campaign became public. Since the options didn't expire until 2017, Trian argues, Ms. Kullman "seems to lack confidence that DuPont shares will be worth more than $72 in 2017."
In an April 13 e-mail to employees, later filed with U.S. regulators, Ms. Kullman called the charge "misleading," noting the sales were part of a regulated stock-sale plan that exercises options at a predetermined price.
DuPont's pitch is focused on selling its "multiyear strategic transformation" and the qualifications of its board, mostly top "world-class" executives.
DuPont notes its shares have risen 266 per cent over the past six years, outperforming the S&P 500 and the peers the company chose for executive compensation comparisons. (Trian replies that much of this return came when investors learned Trian was buying into and advocating for change at DuPont.)
To me, the best part of the DuPont pitch is the message from two directors: Ed Breen, the former CEO of Tyco International PLC., and Jim Gallogly, the former CEO of chemicals company LyondellBasell Industries NV. The two men joined the DuPont board in February after declining Trian's offers to affiliate with the firm, in the case of Mr. Breen, or join its slate of proposed directors, in the case of Mr. Gallogly.
Trian's "plan to break up and add leverage to DuPont is part of the playbook that they've applied to companies in other industries, and it has produced negative results outside their core competency, which is really the consumer/retail sector," Mr. Breen said in a letter to shareholders. (For the record, Trian claims not to be set on the idea of a DuPont breakup.)
Unlike other DuPont shareholders, however, I can go to Institutional Shareholder Services and Glass Lewis, two proxy-advisory firms, and get their reports. Both, to certain degrees, argue that change is appropriate.
Glass Lewis recommends a vote for Mr. Peltz, but none of his other nominees, as the firm says "election of multiple dissident nominees is unwarranted." ISS recommends Mr. Peltz and one other Trian nominee, John Myers, the former CEO of General Electric Asset Management.
ISS is sharp in its critique: "This is not a broken company – but there is compelling evidence that the dissidents are onto something in their critique. Operating efficiency is not what it should be, yet instead of addressing the core issues, the board and management, at least in their communications with shareholders, are more inclined to obfuscation than accountability."
I'm inclined to agree, but I'm willing to give the board a respite from having Mr. Peltz himself in the boardroom, after all the bad blood that has occurred. So, I'm casting my votes for the three Trian Group nominees other than Mr. Peltz, all of whom have fine credentials, and who also may show a bit more independence than one of Mr. Peltz's Trian colleagues.
(This article has been updated to clarify Trian's discussions with two DuPont directors prior to their appointments to the DuPont board.)