By David Benoit
Less than three weeks before of one of the largest proxy votes
in history, activist Nelson Peltz received an important
recommendation saying he deserves a seat on the board of DuPont
Co.
Institutional Shareholder Services Inc. said Monday that DuPont
shareholders should elect Mr. Peltz and John Myers, two of the four
nominees Mr. Peltz's Trian Fund Management LP has put forward in an
increasingly bitter fight for shareholder votes.
The sides have traded barbs for months about whether Mr. Peltz,
72 years old, deserves a seat on the chemicals giant's board.
Trian says Mr. Peltz will help ensure the company delivers
results after failing to live up to its promises. DuPont has opened
its doors to a Trian-nominated representative on its board, but not
to Mr. Peltz, saying he would be fixated on creating a "shadow
management team" to drive a dramatic breakup the board has already
rejected.
ISS, whose opinions can help sway some shareholders, said
overall having Mr. Peltz on the board would be a positive for
DuPont. "The real risk seems less that one wily shareholder nominee
outfoxes eight incumbents than that the right issues are never
fully aired."
DuPont shares rose 4.6%, one of their biggest percentage gains
in the past two years, giving Trian a new talking point. The
activist has already said it was the catalyst for some of the best
days in DuPont stock in recent years and suggested that the
possibility it would lose the proxy vote was one reason for a
recent stock slump. DuPont says the stock's long-term,
market-beating returns are a validation of its strategy.
DuPont on Monday said ISS reached the "wrong conclusion" and
that the opinion was "ignoring the success of our transformative
strategy and the value-destructive nature of Trian's breakup
agenda." The company defended its current board as having the
"right mix of experience and skills" and reiterated its concern
that what it called Trian's "shadow management team" could harm the
company.
The opinion was a victory for the New York investment fund even
though ISS backed only half of its nominees. Last year, Trian
privately asked for a single seat on the board. But after DuPont
was steadfast in refusing to take a Trian principal, the activist
launched its proxy fight for four seats.
Since September, DuPont and Trian have waged a public battle
over DuPont's future. The fight is scheduled to come to a head next
month in Wilmington, Del., when shareholders are set to vote on the
board nominees. The fight could still settle before the May 13
vote.
ISS, the largest proxy adviser, can influence how institutional
shareholders such as mutual funds vote, though its recommendation
isn't seen as insurmountable to the losing side. ISS bases its
decisions in such situations on two questions: whether an activist
has made the case that change is warranted; and, if yes, whether or
not the dissident is better placed than the current board to drive
such change.
The vote is anticipated to be particularly close at DuPont,
whose $65 billion market capitalization makes it one of the largest
companies to face such a campaign. Both sides are aggressively
canvassing shareholders across the country, meeting with portfolio
managers at large shareholders individually and with some smaller
professional investors in group meetings.
To decide on their vote, major institutional shareholders
typically use internal voting committees, which some say reduces
ISS's impact though the shareholders' committees still take ISS's
views into account. Indeed, some high-profile campaigns have seen
companies beat back a negative ISS recommendation.
"ISS is not outcome determinative in election contests, as most
large institutional investors will make independent decisions in
such situations," said Jordan Kovler, of proxy solicitor D.F. King
& Co. "While there are certain quantitative and smaller
institutional investors that unfortunately outsource the process to
ISS, the decisions made by the largest holders will sway the final
vote."
Still, winning ISS's backing can provide a boost, and the proxy
adviser seconded many of Trian's most important arguments,
particularly that performance has been disappointing and that the
management lacks credibility with shareholders.
"This is not a broken company--but there is compelling evidence
that the dissidents are onto something in their critique," ISS
wrote. "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."
Along with Mr. Peltz, ISS advocated the election of Mr. Myers
citing his background running General Electric Co.'s
asset-management business. DuPont had at one point offered to take
Mr. Myers onto the board.
On the issue of whether DuPont should be broken into different
pieces, ISS said it couldn't make a recommendation, but sided with
Trian in saying it should be reviewed.
"There seems little reason to believe a robust, fact-based
boardroom discussion of this topic, as well, would somehow not be
in the best interest of shareholders," ISS wrote.
Write to David Benoit at david.benoit@wsj.com
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