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A Friday Boardroom Battle at UGG-Maker Deckers?

With activists hovering, a director-election fight appears imminent at Deckers Outdoor Corp., as the deadline for shareholders to nominate directors December annual meeting is set for Friday.

By Ronald Orol

With activists hovering, a boardroom battle appears imminent at Deckers Outdoor Corp. (DECK) as the deadline for shareholders to nominate directors at the UGG-boots maker’s December annual meeting is set for Friday.

In June, activist investor Mick McGuire said he would launch a director contest to replace Deckers entire board if an ongoing strategic review process didn’t culminate in a sale of the whole company at a fair price. Nevertheless, no sale appears forthcoming, which suggests that either a boardroom battle or settlement installing dissident directors is imminent.

There is a chance the company could postpone its nomination deadline and annual meeting currently set for Dec. 14, to buy itself more time for its review. However, with a specific meeting date set that seems unlikely. In addition, Deckers could announce a deal.

However, Sam Poser, an analyst at Susquehanna Financial Group, said a sale of Deckers does not appear to be materializing in a timely manner, adding that he thinks that as a result it is likely that Marcato will launch a director-election battle. “We continue to believe that a takeout by a strategic buyer at current price levels or higher is unlikely,” Poser said. “Accordingly, the chances that Marcato may have to pursue a proxy contest is on the rise.”

A key issue is the state of the UGG brand, which isn’t as healthy as it once was. In June, Poser said in a report that he spoke with potential strategic buyers who have told him that they wonder why anyone would pay for a UGG brand that has annual revenue of about $1.5 billion when the company would be a more efficient brand at $1 billion in annual revenues. Poser noted that Deckers had an EBIT blah in fiscal 2017 of about 9.25%, significantly down from its 2014 EBIT blah of 12.9%.

Nevertheless, Poser said he values Deckers, based on a some-of-the-parts analysis, at $62 a share, with a $52 a share to $71 a share range for high and low scenarios. Poser added that if nothing comes of the strategic review, he expects the stock to revert to about $42 a share. It currently trades at $63.83 a share.

Since all directors are elected annually it is very possible that McGuire and his insurgent fund Marcato Capital Management LLC, could seek to take control of the board as he said he may. If McGuire succeeds it is very likely that he will try to shake up the company’s management team, which is headed by CEO Dave Powers.

And in what appears to be an effort to appease a restless shareholder base that might be thinking of backing McGuire, Deckers made a change to its board last month. Angel Martinez, the ex-CEO and most recently Deckers chairman resigned from his chairman position, though he remains on as a director. Marcato Capital’s McGuire had made known his displeasure about Martinez’ political ambitions and had criticized his run for mayor of Santa Barbara, Calif. as a distraction from his Deckers duties.

In addition, another activist,  Red Mountain Capital Partners LLC, also owns an interest in the company of about 3%.

Expect McGuire to have some measure of success installing directors, as he did recently with a successful boardroom battle at Buffalo Wild Wings (BWLD). However, it is unclear whether his ultimate goal of driving the footwear company to sell itself will succeed.

“Do I think he gets people on the board,” said one analyst. “Most likely he will.”

An adviser to Marcato did not return a request for comment.

Is 75 Too Old for the Boardroom?

Activists are targeting boardrooms with older, over-tenured directors and your company could be next: BoardEx reveals that there are 2,631 directors over the age of 75 at U.S.-listed companies.

By Ronald Orol

A director-election battle is set to go the distance at CDI Corp. (CDI) in June and the two veteran activist investors at the gate see “chronic governance failures” as a key issue at the engineering, staffing and IT company. The fund managers, Josh Schechter and Bradley Radoff, cut their teeth in the early 2000s working at established activist funds Steel Partners and Third Point LLC, respectively. They argue that CDI should look into selling itself because its share price has been on a downward trajectory, and prospects, in their opinion, look bleak.

To back up their boardroom shuffle effort, Schecter and Radoff are focusing on replacing five incumbent board members, with incumbent directors Lawrence Karlson, 75, Michael Emmi, 76 and Barton Winokur, 77, as potential targets. The trio have sat on the CDI board for 28, 18 and 49 years respectively and the company’s founder, Walter Garrison, 91, is chairman of the board.

“You have a group of people who have overseen this company, through multiple CEOs, as it continues to deteriorate,” said Schechter. “Several of them have been on the board for decades. It is apparent they don’t have the skill set and know-how to execute. Over-extended tenure is a serious issue when the situation is clearly not working for shareholders.”

The campaign puts a spotlight on a core governance issue often highlighted by activists seeking to shake things up at targeted companies - that over-tenured directors reaching their twilight years often need to be replaced, especially when the length of time they have spent on the board suggests that they may be too cozy with management and no longer have the skills needed to drive share-price improvement.

“Tenure and age often come into play when it comes to contested elections,” said Pat McGurn, special counsel at proxy adviser Institutional Shareholder Services. “The activist investors usually call into question whether the senior directors who have sat on a particular company’s board for a long time are independent. Barely a contest goes by where activists don’t target an older director with a younger director they are nominating.”

In addition to CDI, many other companies have been the target of activists, with a focus on over-tenured older directors, including Viacom Inc. (VIAB), Bed Bath and Beyond Inc. (BBBY) and Eastern Co. (EML) And many other directors on the older and over-tenured side could soon become activist targets if the companies they oversee fail to perform.

According to relationship mapping service BoardEx, a service of The Street, there are 2,631 directors 75 or older at U.S.-listed companies, 850 of which are 80 or over and 51 are over 90. Directors 75 or over represent about 10% of the 27,809 directors at U.S. publicly-traded companies, according to BoardEx, and there 323 directors over the age of 75 at S&P 500 companies. Alternatively, BoardEx reports that there are only 195 directors on U.K. publicly-listed companies over the age of 75, 47 of which are over 80 and two over 90.

Last year Bed Bath and Beyond directors Stanley Barshay, 78, Dean Adler, 61, and Victoria Morrison, 63, all members of the retailer’s compensation committee, were targeted in a shareholder “just vote no” campaign led by the New York City Pension Funds. The directors, considered over-tenured by governance experts, received negative votes of about 35% of participating shares. The campaign also convinced a majority of shares to vote against the senior pay packages at the retailer.

Also consider Eric Jackson, a tech and media activist, and his campaign to shake up Viacom in 2015. In a 99-page presentation, partly targeting Sumner Redstone, 93, the then-controlling shareholder, Jackson noted that the media giant had the “oldest directors’ on average,” at 66, of any of their media peers.

In another situation, Jim Mitarotonda and his activist fund, Barington Capital won two director seats on security product company Eastern Co.’s (EML) board recently, in a move that removed one director, David Robinson, who had been there for 25 years and was 72 years old at the time.

In many cases corporate boards have a hard time removing directors that have been at the company for a long time but no longer have the skill set needed to meet the latest challenges facing the company. Activists argue they can come in and become a catalyst to help boards bring in the new directors they need, especially when corporations are uncomfortable about asking people who have provided such long service to leave.

Anne Sheehan, governance chief at the California State Teachers’ Retirement System, or CalSTRS, points out that many corporate boards have set up retirement ages in their bylaws, which she said could be good or bad. “Sometimes you can lose good people or it can be used to move people along that need to move on,” she told a gathering of the Council of Institutional Investors in February.

In addition, she put a spotlight on a General Electric (GE) board policy that she thought was “sort of revolutionary” that sets a board tenure limit of 15 years for all directors except the CEO. John Brennan, GE’s lead independent director, told the gathering that the limit helps to make sure individuals with the proper skill sets continue to be in place to meet changing needs. “The challenge in a place like GE is you need to understand the big business issues and then you want people on the board with digital experience, or healthcare experience or manufacturing experience,” Brennan said. “It’s an ongoing project.”

Brennan said the limits help create age and “cognitive” diversity in the boardroom. “A 45 year old tech leader thinks differently than a 65 year old financial guy,” he said. “That is one of the great appeals of term limits. It’s nice to have different generations in the boardroom.”

A 2016 study by SpencerStuart, an executive search firm, reports that 73% of S&P 500 boards have set a mandatory retirement age for directors, and that a little under half of those have it set it at age 72. The study noted that setting the retirement age at 75 is a trend that has accelerated in recent years, with 39% of boards having putting their cap at that level or higher, compared with 20% in 2011.

A look at the oldest and youngest boards reveals a cross-section of corporate America. Among the oldest boards in the U.S. include CBS Corp. (CBS), Kinder Morgan Inc. (KMI), and M&T Bank Corp. (MTB), according to BoardEx. CBS has 11 members over the age of 70, four of which are over 80 years old, Kinder Morgan has ten members over 70 and M&T has nine. The Oracle of Omaha, Warren Buffett, 86, is one of five members at stellar performer Berkshire Hathaway (BRK.A) who is over the age of 80. (Charlie Munger is 93). And Costco Wholesale Corp. (COST) has four members over 80, including two over 90.

Alternatively, the three youngest boards, according to BoardEx, are Tripadvisor Inc. (TRIP), with an average age of 49.9, Facebook (FB), 50 and Coach Inc. (COH), 53. For now, however, activists will target underperforming boards with over-tenured, older directors. But as with Berkshire Hathaway, not all older, long-tenured boards, make good activist targets.

In fact, Jackson, formerly of activist fund SpringOwl and a key investor critic of Viacom’s board, takes issue with corporations that set up age limits, arguing that it is very hard to “legislate” good governance.

“We can create easy to define rules like ‘no directors over the age of 80’ but the truth is that can’t get at the dynamic of a discussion in a room,” Jackson said. “Some 80-year-olds could stay on some boards another 10 years. Some 60-year-olds are checked out.”

CorpGov Expert on Alphabet’s Board: You Can’t Monitor Yourself

With Google CEO Sundar Pichai, Alphabet’s 13-member board now has 5 executive directors. Too many, says a governance critic.

By Anders Keitz

Alphabet Inc.’s (GOOGL) appointment of Sundar Pichai, the CEO of Google, to its board of directors means five executives will have a seat at the table, which is not the standard at a public company, according to a corporate governance expert.

“The board no longer operates as an oversight vehicle that investors imagine,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“Directors are there to oversee management,” Elson said. He said that having this number of executive directors “confuses the role because you can’t monitor yourself.”

Pichai (pictured below) will serve alongside four other executive directors, co-founders Larry Page and Sergey Brin, chairman Eric Schmidt and Google senior vice president Diane Greene, on the 13-member board. Pichai joined the Mountain View, Calif.-based Alphabet, formerly known as Google Inc., in 2004 as vice president of product management, according to BoardEx, a relationship mapping service of The Deal. In April 2011, Pichai was named senior vice president of products, and he assumed the role of CEO at Google in 2015 when the company reorganized as Alphabet, which has a current market capitalization of $664 billion.

“Sundar has been doing a great job as Google’s CEO, driving strong growth, partnerships, and tremendous product innovation,” Alphabet CEO Larry Page said in a statement. “I really enjoy working with him and I’m excited that he is joining the Alphabet board.”

Still, it is typical for most public companies to have just one executive director on the board, usually the CEO. Alphabet’s board functions in a different way because of its dual stock structure, Elson said.

“The board is controlled by management through the dual-class structure,” said Elson.

Alphabet established Class B stock to preserve the control of the founders and gives them ten times the voting power compared to Class A shares. The company’s Class C stock, under the ticker GOOG, has no voting rights and is normally held by employees and Class A stockholders.

“The typical retort from proponents of dual-class structures is that depriving most investors of equal voting rights allows managers the leeway to make forward-thinking decisions that cause short-term pain for overall long-term gain,” Blair Nicholas and Brandon March of the law firm Bernstein, Litowitz Berger & Grossmann LLP wrote in a May post for the Harvard Law School Forum on Corporate Governance and Financial Regulation. “This assertion, however, ignores that many investors – and in particular public pension funds and other long-term institutional investors – are themselves focused on long-term gains.”

The Deal reached out to influential proxy advisory firms Glass Lewis & Co. LLC and Institutional Shareholder Services for comment on the addition of Pichai to the board. Glass Lewis did not respond before the time of publication; ISS declined to comment.

Alphabet also did not immediately respond to a request for comment.

Shares of Alphabet dipped Tuesday and Wednesday as analysts and investors focused on Google’s rising traffic acquisition costs despite beating Wall Street’s expectations on nearly every metric.