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Indie Advisory Weighs in on Board Battle—Is it the Mic Drop Genesco’s Hoping for?

The controversial power struggle between Genesco and an activist investor for the retailer’s board seats has now gotten attention from an independent proxy advisory firm that specializes in issuing voting recommendations to clients and shareholders.

Institutional Shareholder Services (ISS) officially recommended that Genesco shareholders vote for all nine of the company’s current director nominees at Genesco’s annual shareholder meeting on July 20.

Activist investor Legion Partners wants to replace four of Genesco’s board members—Matthew Diamond, Thurgood Marshall, Jr., Joanna Barsh and Kevin McDermott—with four independent director candidates of its own: Marjorie Bowen, Margenett Moore-Roberts, Dawn Robertson and Hobart Sichel.

But the Journeys owner has been skeptical of the nominees, pointing out that none of them has specific footwear experience or operated an e-commerce business of the shoe maker’s size. Genesco said in a proxy statement in June that Legion’s nominees have been involved in eight combined bankruptcies and two have “apparent deep ties” to Legion, which has proposed their names in “multiple” other activist campaigns.

Bowen and Moore-Roberts were both initial nominees when Legion and three other firms sought to shake up the Kohl’s board with nine new members earlier in 2021. Neither nominee ended up being elected, and the board wasn’t fully overhauled, but Kohl’s and the activist investor group reached an agreement to bring aboard two activist-approved nominees as well as former lululemon CEO Christine Day as independent directors.

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ISS is firmly on the side of Genesco, highlighting in an internal report that Legion’s nominees “do not appear demonstrably superior to the directors whom they would replace.” The firm also said that the four most recently appointed members of Genesco’s board “appear to be appropriate additions,” and as such “the immediate removal of the four longest-tenured directors standing for reelection does not appear necessary.”

However, the firm said it was wary that Bowen “provided very limited details about what she would like to accomplish in her second term on the board” and that Robertson’s “short-lived tenure at many companies seems valid and based on fact rather than opinion.”

Additionally, ISS said that both Sichel and Moore-Roberts lack public board experience. The Genesco board already considered Sichel “on their own volition and decided against advancing his candidacy,” it added, while Moore-Roberts’ skills in building an inclusive customer base and workforce are not among the footwear seller’s “most urgent needs.”

Thus “the potential contribution of Legion’s nominees to the board would therefore appear to be limited,” ISS concluded.

ISS did not offer a public statement on the Kohl’s dispute, which ended in the compromise. The proxy adviser did not immediately respond to a request for comment.

“We are gratified that after a comprehensive review and analysis, ISS recommended that shareholders vote “for all” of Genesco’s highly qualified directors for reelection at our upcoming annual meeting,” Mimi Vaughn, board chair, president and CEO of Genesco, said in a statement. “In its recommendation, ISS clearly recognizes that the skills and experience of our directors are essential to the continued execution of our footwear-focused strategy, which is producing clear and positive results, and that Legion’s nominees would not bring anything new or additive to our board.

“This endorsement from a leading proxy advisory firm underscores our strong belief that we have the right board and strategy in place, and that we are well-positioned to succeed and enhance long-term shareholder value in a rapidly evolving retail landscape,” she added.

Activist investor calls out ‘conflicting’ recommendation

Legion, which owns approximately 5.9 percent of the common shares of Genesco, Inc., fired back with a statement of its own to shareholders, with the asset management firm’s managing directors calling the ISS report “contradictory.”

“We contend this conflicting recommendation sends a terrible message: an insular and underperforming board of directors can avoid accountability when a sizable shareholder nominates by simply enacting incremental, unilateral refreshments. We believe boards should regularly refresh and improve their skill sets and experience—not just wait to do the least necessary only under pressure from shareholders,” said Chris Kiper and Ted White, Legion Partners’ managing directors.

“The fact that the Genesco Board has been so stale despite years of deteriorating performance offers strong evidence of an insular culture and lack of alignment with shareholders,” they wrote. “This is the essence of the risk the ISS recommendation does not address. If shareholders allow this type of entrenchment maneuver to become accepted precedent, we fear there will be long-term negative consequences for the company’s investors, employees, consumers and other corporate stakeholders.”

The hedge fund pointed to several areas in the ISS report that it believes are inconsistent with its final recommendation. ISS said that all segments other than Journeys experienced “lackluster or declining sales growth and overall adjusted operating margin deterioration.” Operating margins, although positive, have been “deteriorating for years,” it added.

In other examples, Legion called out instances where ISS said the Johnston & Murphy owner trailed that of its peers, including both digital penetration and valuation multiple.

Legion’s campaign should be credited as a catalyst for the recent improvement in board composition, and the dissident raises a reasonable question as to whether GCO’s self-refresh has been sufficient to address the company’s issues,” the investor concluded.

On July 1, Legion published a letter that its four new nominees sent to shareholders outlining the financial goals for Genesco, and the strategies taken to achieve those targets.

But Genesco immediately fired back, saying its stock price in 2021 increased significantly when compared to competitors. Genesco argued that Legion’s activist campaign, launched on April 12, had the biggest negative impact on the footwear retailer’s stock this year. From Legion’s inaugural attack until Genesco announced first-quarter earnings on May 27, the stock traded below its peer group on 64 percent of days.

Legion lays out reasons to replace directors

Of the four directors Legion wants to replace, lead independent director Diamond has been on the board the longest, serving on the board since 2001. Marshall joined Genesco’s board in 2012 serves on the board of CoreCivic Inc., a publicly traded, full service corrections management and real estate solutions provider. Barsh has been a director since 2013, and currently serves as senior partner emeritus of global management consulting firm McKinsey & Company. And McDermott, a director since 2016, retired as a partner of the international accounting firm KPMG LLP in 2013.

In its statement, Legion referred to the board, namely these four, as “long-tenured individuals with concerning interlocks and extremely poor track records.” Legion accuses Diamond of presiding over “excessive executive compensation, sustained underperformance and very questionable corporate governance decisions.”

Legion shared ISS’s conclusion regarding Diamond, noting that shareholders might reasonably be concerned that his 20 years on the board could “reduce his independence from the management team he is charged with holding accountable.”

The firm also said that Marshall had an “extremely concerning lobbying background” which includes influencing for organizations such as an asbestos group and a paid militia, and sitting on boards of directors that sent “lucrative” work to his former law firm.

Legion included Barsh in its critique of Genesco’s executive compensation, saying she holds “significant responsibility” for the company’s “misaligned executive compensation structure.” Finally, it criticized McDermott for having “no relevant retail or footwear experience” and “perpetuating the culture of concerning interlocks.”

Genesco hasn’t been the only retail company ISS has weighed in on. Alongside another proxy advisor, Glass Lewis, ISS also recommended that investors of U.K.-based online fast fashion e-tailer Boohoo vote to oust co-founder and executive director Carol Kane at its June 18 annual meeting over the company’s inability to curb poor working conditions at supplier factories. The shareholders elected to keep Kane in her position.

Co-founder and current chairman Mahmud Kamani was not up for reelection at the meeting. Kamani previously said “We have made some mistakes,” in a U.K. parliamentary hearing in December, but said the company has “done more right than wrong” over the past 14 years.

ISS also advocated for Amazon to add an employee to its board after shareholders called for the e-commerce giant to consider nominating an hourly employee. The resolution was presented at Amazon’s annual shareholder meeting on May 26, but was ultimately denied.