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Ackman’s Activism Backfires, Forced Out by JC Penney

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Concluding a very public and contentious dispute, hedge-fund manager William Ackman has officially resigned from the board of JC Penney. In response to Ackman’s departure, the board will be bringing on Ronald Tysoe, who has served as a top executive at Macy’s.

Ackman’s resignation is the culmination of an unusually acrid feud between the activist investor and the JC Penney board over the future of the beleaguered retail icon. The fracas detonated like a bomb last week when Ackman publicly released two scathing letters he sent to the board, upbraiding them for dragging their feet replacing Mike Ullman, the CEO of JC Penney who replaced ousted Ron Johnson. JC Penney Chairman Thomas Engibous responded acrimoniously, calling Ackman’s comments “misleading, inaccurate and counterproductive.”

Engibous didn’t stop there: “The Board of Directors strongly disagrees with Mr. Ackman and is extremely disappointed that his letter was released to the media at the same time that it was sent to the Board. Mr. Ackman has been integrally involved in the Board`s activities since he joined two years ago. This includes leading a campaign to appoint the Company`s previous CEO, under whose leadership performance deteriorated precipitously. His latest actions are disruptive and counterproductive at an important stage in the Company`s recovery.”

Ullman was Johnson’s predecessor as CEO, and then returned in April to the post as his interim replacement once Johnson was given the boot. Ackman acquiesced to Ullman’s return begrudgingly under the condition that the board immediately begin to look for his successor.

In July, already strained relations between Ackman and the board deteriorated further when Ackman threatened to sell his considerable stock holdings unless the board quickened what he considered to be a laggard pace finding a new CEO. The board enlisted the services of Heidrick & Struggles International Inc. to manage the search for someone to take over the helm at JC Penney.

Ackman has exerted considerable influence at JC Penney as their  biggest single shareholder, owning nearly 18 percent of the company through his Pershing Square Capital Management LP. He has already lost more than $600 million of his stake as JC Penney hemorrhages money, its sales down a staggering 25 percent over the last year.

Following Ackman’s publicly issued complaints, he sustained withering criticism from multiple quarters. After JC Penney’s board professed “overwhelming support” for Ullman, Howard Schultz, CEO of Starbucks Corp. piled on, “Mike is working tirelessly to save this company, and it is despicable of Ackman to leak a letter asking for his removal. The irony is that Ackman himself has every step of the way severely damaged this company.” Ullman sits on the board of Starbucks.

Ackman has insisted his efforts have no other aim than restoring JC Penney to its former greatness. “As the largest shareholder of JC Penney, I have only one goal: help save one of the great iconic American companies.”

It remains unclear what will become of Ackman’s relationship to JC Penney now that he has vacated his seat on the board. If he plans on dumping his stock holdings, he’ll be limited by contractual restrictions on how quickly he can unload them. Ackman insists he has no intentions of selling.

Moreover, it’s still possible, maybe even easier, for Ackman to play an influential role in the future of JC Penney. Now that’s he’s no longer on the board, and so no longer restrained by a slew of rules that govern board members, Ackman might actually be better positioned to lobby other shareholders or to adjust his holdings.

The controversy surrounding Ackman’s dismissal has ignited debate about the impact career investors are having on the retail industry at large. In 2010, Ackman joined forces with Stephen Roth, CEO of Vornado Realty, to amass significant JC Penney stock in order to wield enough clout to jockey for positions on the board. The two conspired to have Ullman removed as CEO and then ushered in Ron Johnson, whose tenure is now widely considered disastrous.

Many industry insiders have openly questioned whether or not Ackman has the retail experience, or the experience running any business, to effectively steer JC Penney to renewed success. Ackman’s general strategy was to radically reduce personnel at JC Penney’s headquarters, streamlining the company’s expenses in an effort to increase the value of its stock. However, he has failed to regain lost sales momentum, bleeding customers many believe will never return. Some point out that Ackman once tried to compel a new business model at Target by buying up its stock in the hopes of commandeering a spot on their board. That attempted coup backfired as well, inspiring Ackman to sell off his stake and turn his focus to other possible conquests.

Ackman’s parting shot justified his aggressive intervention and called for a shakeup of the board’s composition.

“If you’re a member of a board and you believe a company is heading in the wrong direction and the issues are serious, and you’re unsuccessful in convincing the board to go your way, you have an obligation as a director to share your concerns with the other owners of the business: the shareholders. I did that by writing an open letter to the board outlining my concerns that shines a spotlight on those issues and motivates all parties involved – the board, the management and the shareholders – to get to the right answers. The downside to that is it potentially makes the boardroom dynamics more difficult going forward. The infusion of fresh blood to the board at this time is a good solution to that problem.”

 

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