By David Benoit
Even before Nelson Peltz got on the board of H.J. Heinz Co., he
began making marketing suggestions. As he watched coverage of
Nathan's Famous Hot Dog Eating Contest over the Fourth of July
weekend in 2006, he didn't see any signs of Heinz's famous
ketchup.
He called Heinz's bankers and pointed out the opportunity.
A year later, after the activist investor and his Trian Fund
Management LP had successfully won two seats on the board, Heinz's
logo was front and center as Joey Chestnut unseated six-time
champion Takeru Kobayashi.
The Fourth of July interaction was just a taste of what it's
like to have Mr. Peltz and Trian on a board.
Attention to detail is one of the traits that proponents of Mr.
Peltz and Trian say makes him a valuable member of any board. But
in Trian's current fight, against chemical giant DuPont Co., its
style has become a lightning rod.
DuPont has resisted taking Mr. Peltz, or any Trian executive, on
its board--saying he would establish a "shadow management" at the
212-year-old maker of Kevlar body-armor and Teflon nonstick pan
coating.
Trian's battle with DuPont, whose $66 billion market value makes
it one of the biggest proxy campaigns to be waged by activists, is
set to culminate next week, two years after Trian first bought its
stock. DuPont shareholders are to vote Wednesday on whether to
appoint Mr. Peltz and three other Trian nominees to the board.
The battle is shining a light on New York-based Trian, and what
distinguishes it from rival activists. These investors amass stakes
in companies and then push for changes they think could boost the
stock, such as buybacks or dividends, asset sales or leadership
changes.
Activists seldom go so far as to seek a board seat, as doing so
could tie their hands from trading in the company's shares. But
Trian aims to be a relatively long-term holder. Once on boards,
with access to confidential information, Trian directors drive
debate on operational and strategic decisions.
"We eliminate the management information advantage," says Trian
co-founder and chief investment officer Ed Garden. "We influence
the agenda in the boardroom so that everyone is focused on what's
gone wrong, so a lot of smart people around a table can have an
honest discussion about it."
Trian, which oversees about $11 billion in assets, recently
disclosed its returns in an effort to show that it improves
companies. Since its November 2005 start through the first quarter,
its flagship fund has returned 137%, after fees, Trian disclosed
recently, beating the S&P 500's 108% return and doubling the
average 59% return of hedge funds tracked by researcher HFR.
The disclosure came after Yale University Professor Jeffrey
Sonnenfeld argued that companies' results after Trian joined their
boards were lackluster.
Meanwhile, even some skeptics are giving Trian credit. Martin
Lipton, a corporate lawyer known for his anti-activism work, said
last month Trian has "clearly established credibility and
acceptability."
The DuPont fight comes amid a broader shift in thinking about
the roles of board members. Academics and lawyers say convention
has evolved from "board-centric" governance of companies, where
directors are more deferential and used by management for guidance,
to shareholder-centric, where directors are more willing to be
skeptical.
"There's a new generation of directors; they are apprised of the
fact that investors have ideas and want to be heard and they are
comfortable with that," says John Olson, of Gibson, Dunn &
Crutcher LLP.
Pushing that shift even further: Activist firms such as Trian,
ValueAct Capital Management LP and Relational Investors LLC, the
vanguard of a new class of professional, activist board members who
come bearing ideas.
DuPont is pushing back as its directors say that isn't a board
member's role. DuPont says its board has studied--and
rejected--breaking up the company as Trian has suggested. It
doesn't want to be pressured to go over that ground again, and
gives little heed to Trian's more-recent protestations that it is
open to other conclusions. It also questions whether Trian has
relevant experience.
The investor "would be committed to advancing Trian's breakup
agenda and derail management's ongoing execution of a successful
strategy that is building a higher growth," DuPont wrote to
shareholders last month.
Trian is adamant it will be open to other ideas when it gets
inside, although it maintains a breakup is likely a good idea.
Last week, Mr. Peltz won important endorsements when two
shareholder advisory firms said he should be elected to DuPont's
board. Each rejected the idea he would be an overbearing board
member.
Mr. Peltz, 72, made his name in the 1980s and after running
several public companies, he, longtime partner Peter May and Mr.
Garden, an investment banker and his son-in-law, started Trian in
2005.
The men acknowledge their intensity can be off-putting to CEOs
who think they are doing well, and say that is why they approach
companies privately.
Trian's involvement has resulted in just one CEO change, while
other activists have increasingly driven executive changes after
getting board representation. Instead, Trian, at times, has made
friends with executives, as happened at its only other shareholder
fight, Heinz.
Nine years later, Heinz's former finance chief, Arthur
Winkleblack, is a Trian nominee for DuPont's board, and the former
CEO, William Johnson, is an adviser who joined the board of PepsiCo
Inc. at Trian's behest.
At the start of the Heinz proxy fight, board members didn't know
much about Trian and feared what would happen as Mr. Peltz and
Trian nominee Michael Weinstein won election to the board, say
former directors.
The first 90 days were stressful, people on both sides say.
Trian received box after box of old board minutes, income
statements for individual businesses and specific products,
manufacturing reports and the details of an overseas expansion.
Heinz executives joked that the activist investor had asked for
the ancient Dead Sea Scrolls.
Mr. Peltz and his Trian analysts were after what they call
"perfect information" about the ketchup maker--the insider
knowledge they wanted to help advance their ideas. They pushed for
more marketing spending, and the board sped up plans to do just
that.
Trian had also argued that international expansion was wasting
money. But other board members convinced Mr. Peltz the emerging
markets were promising.
"He had a little more analytical strength behind him than the
rest of us, " says Thomas Usher, the former chief executive of U.S.
Steel Corp. and Heinz's lead independent director. "He wasn't
pushy. It was never 'my way or the highway.' "
Mr. Winkleblack and other board members say they came to rely on
Trian particularly for guidance on deals, including its biggest.
Mr. Peltz was on the special committee that negotiated to sell
Heinz for $23 billion to Brazilian billionaires 3G Capital Partners
LP and Warren Buffett's Berkshire Hathaway Inc. in 2013.
Dennis Reilley, also now a Trian adviser and a director at
DuPont rival Dow Chemical Co., says Messrs. Peltz and Weinstein
represented a minority so didn't have actual power, but that Mr.
Peltz was compelling.
"The best board members are the ones who do their homework, come
up with good ideas, and hope they can compel the others to do it,"
Mr. Reilley says. "That's what Nelson did."
Access Investor Kit for Berkshire Hathaway, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0846701086
Access Investor Kit for Berkshire Hathaway, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0846707026
Access Investor Kit for E.I. du Pont de Nemours & Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2635341090
Access Investor Kit for Nathan's Famous, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6323471002
Subscribe to WSJ: http://online.wsj.com?mod=djnwires