Retail shareholders cited as key to DuPont's victory

Even though the DuPont Co. won its bitter proxy war Wednesday, it learned a valuable lesson on retail shareholder engagement in fending off activist investor Nelson Peltz, analysts said.

The chemical company emerged from its annual shareholders meeting with its board of directors slate intact as none of Peltz's four nominees won a seat, although the vote was said to be close.

Both Peltz and DuPont CEO Ellen Kullman cited retail investors, individuals who own stock for personal benefit, for turning the election in favor of the company's director slate.

Analysts praised DuPont's effort to reach out to these investors during the battle, but cautioned that DuPont must continue to address shareholder needs if it wants to avoid another fight.

"I think the issues Peltz brought up are still there," said Alon Brav, a professor of finance at Duke University. "If you are Kullman, this thing still resonates in the background and you know that you have to deliver for all of the constituents. That is a good thing."

This marks the first time Peltz has failed to get one of his nominees elected to a company's board of directors.

"We are proud of the role we played as a positive change agent at DuPont," said a statement from Peltz's Trian Fund Management. "The vote was close. ... We will continue to monitor DuPont's performance."

Gary E. Hindes, a Wilmington resident and longtime investment company chairman, termed DuPont's board win nothing less than "a watershed moment."

"Loading companies up with debt, breaking them up just to enhance shareholder value is not a good long-term strategy," Hindes said. "I'm hoping that this is part of a new trend, that this business of looking for quarterly earnings and not looking at the big picture, 20, 30, 40, 50 years out, is coming to an end."

The victory will likely keep DuPont's research and development units together. The company has two large research and development facilities that employ roughly 3,100 workers in Delaware, including hundreds who hold a doctorate.

Peltz had nominated four candidates, including himself, to implement aggressive cost-cutting, vowing to eliminate between $2 billion and $4 billion of what he called "excess corporate costs." He also had proposed splitting the company into two pieces, a move many say would have impacted DuPont's growth.

John Dodd, of Pennsylvania, was a DuPont employee for 27 years. He voted for all 12 DuPont board nominees because of concerns Peltz would find some of those savings in the company's research budget.

"I'm very much for keeping the DuPont board the way it is and against what Trian is trying to do," Dodd said. "In terms of research and development, [Peltz] would be a very bad thing."

Gov. Jack Markell said one of DuPont's Delaware research hubs, the Experimental Station, is key to the state's economic success. The Experimental Station employs 2,500 workers on a 150-acre campus on Del. 141 in New Castle County.

"We are trying to build an economy around innovation in Delaware, and the Experimental Station is a very important part of that effort," Markell said.

Peltz advocated selling off non-core assets such as the Hotel du Pont and the DuPont Country Club, and spinning off units to increase shareholder value. Peltz claimed these efforts could push DuPont's stock price above $120 per share. DuPont responded to such claims by informing stock owners of its track record of investor returns. The company, according to DuPont annual reports, has produced shareholder returns of 160 percent over the past five years, topping its proxy peers and the Standard & Poor's 500.

Kullman told the media shortly after the proxy vote was announced that DuPont's focus on talking with shareholders helped sway some votes in favor of its candidates.

"We've been spending a lot of time with our shareholders over the last few months," she said. "It's been a great engagement to understand their views, where they see our opportunities are and where they'd like us to continue to focus."

John Roberts, an analyst at UBS Securities in New York, said DuPont's recent moves show the company paid attention to shareholder demands. He cited the chemical giant's recent cost-cutting as an example of the company's willingness to respond to its stock owners.

DuPont has already shed more than $2 billion and expects to slash an additional $1.3 billion by the end of 2017. The company's efforts to reduce costs were announced before Peltz released a September 2014 white paper demanding the company cut expenses.

"DuPont is already doing what shareholders want," he said. "Cost-savings is something DuPont is doing forever. I would be shocked if this is the last cost-cutting restructuring program in DuPont's history. Trian just wanted more of what DuPont is already doing."

Another example of DuPont's responsiveness to shareholder concerns is the appointment of former Tyco CEO Edward Breen and former LyondellBassell Industries CEO James Gallogly as interim directors in February. Both won permanent seats on DuPont's board Wednesday. Peltz said at an April investor conference he tried to recruit Gallogly to be a Trian nominee. Several media reports have claimed Peltz also tried to have Breen join the Trian slate, but Peltz denied the allegation.

Roberts said the addition of Breen and Gallogly will keep DuPont connected with its shareholders.

"I wouldn't say DuPont's board was unresponsive, but with those guys it will be more responsive," he said. "This was a good move by the DuPont board."

The shareholder outreach was particularly effective, because DuPont's retail shareholders heavily supported the board, according to Peltz and Kullman. Large institutional shareholders of DuPont such as the Vanguard Group and Block Rock Fund Advisors won't reveal their vote until sometime in August, so it will not be known how many of them voted for DuPont's slate. But in separate conversations with the media, Peltz and Kullman were quick to note retail shareholders voted for DuPont's board.

"Retail shareholders had a big impact," Peltz said after the announcement, claiming he had "overwhelming" support from big institutional shareholders and mutual funds.

If the final tally shows DuPont scored big with retail shareholders, it emphasizes the need for corporations to focus on such investors when faced with an activist investor proxy battle.

"This created a playbook on how you can defeat an activist investor," said Jeffrey Sonnenfeld, an associate dean at the Yale School of Management. "DuPont never stooped to the vicious personal innuendo coming from one side. They stuck with telling shareholders the facts about their return on capital."

Sonnenfeld said it was still unclear how big of a role the retail shareholders played in electing DuPont's board candidates. He said their role could be especially noteworthy because three major proxy advisory services endorsed at least one Trian nominee and Egan-Jones Co. recommended all four of the hedge fund's proposed directors.

Only Proxy Mosaic, a smaller advisory service focused on corporate governance, supported all 12 DuPont board candidates.

Despite the backing of the proxy advisers, only one institutional fund, the California State Teachers Retirement System, publicly advocated for all four Trian nominees. The CalSTRS recommendation was blunted by two larger institutional investors, the California State Public Employees Retirement System and the Canadian Pension Plan Investment Board supporting the 12 DuPont candidates.

"The institutional voices have been clamped," Sonnenfeld said.

Roberts said it is important for companies to focus on issues important to retail shareholders, who are often interested in more than just increasing the value of their shares.

"A number of retail investors care about more than just the stock price," he said. "They may live in communities where DuPont has plants or they may be a DuPont retiree. The retail investor may take a more holistic view and look beyond just the stock price."

DuPont's stock dropped roughly $5.00 to $69.33 a share Wednesday.

Staff reporters Scott Goss and Jeff Montgomery contributed to this story.

Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.