Case Study Target Corporation: Ackman Versus The Board
Ackman, an activist shareholder, used his equity stake to pressure Target’s management. Ackman’s first proposal was a sales-leaseback of Target’s real estate portfolio, mainly because Ackman believed “the stock exchange did not credit Target for their valuable and large real-estate holdings.” Target owns 85%-95% its stores and buildings, so selling them and leasing the space could create significant value and allow for a potential buyback. Target eventually rejected Ackman’s two-seat proposal, along with the proposal from Target. Ackman grew increasingly critical of Target’s corporate culture and its directors as his proposals were rejected. Ackman launched a campaign to influence the company’s management, nominating an opposing slate of directors. He was concerned about the lack of CEOs on Target’s board, who had experience in both the credit card and real-estate sectors – the two main segments of Target. This, he believed, had contributed negatively to Target’s recent performance. He also pointed out the lack of representation for shareholders on the board. Pershing Square owns 7. He also stated that the current board lacks shareholder representation – he argued that Pershing Square (owning 7. The incumbent board (owning less than 0.
Ackman was also a large shareholder of Target and clearly wanted it to be successful in the short and the long term. Target communicated publicly with other shareholders and encouraged them to reject Ackman’s nominations. The company did this because it believed Ackman’s concerns were not aligned. A substantial portion of Perishing Square’s ownership in Target is in derivative securities, which are due to expire soon. Ackman was likely to put more importance on short-term stock performance and neglect longer term success. Target ultimately won and shareholders voted for 1 Target’s list of candidates with over 70%. Ackman was also affected by this proxy dispute as it cost him around $10 million.
Ackman cannot be said to have complete control over Target Corporation given the situation described in this case study. Ackman’s large shareholding did not mean he had complete control over Target Corporation. He still needed to deal with other shareholders as well as the board of directors to get his proposals approved. Target might have to deal with Ackman if he has the final say, even by proxy. Ackman did not have the status of a “normal” Target shareholder. As a hedge funds manager and owner of common stock, he could be in a conflicted position. Over the last few years, hedge funds have become more active, even if they are a minor shareholder. The corporate governance is seen as positive as it mitigates the agency problem.
Hedge funds are often viewed as extortion by those who see them. They pressure companies into changing certain aspects of their business in order to make a profit on their investments. Ackman may have been motivated by his role as a hedge-fund manager to take action against Target Corporation. The fact that Ackman was also a hedge-fund manager may have been the real motivation for his activism towards Target Corporation. Ackman’s short-termism, which many expected of hedge fund activism, was as damaging as it would have been if that was his true motivation. It is now possible to see Ackman’s actions from a different perspective. He may have acted more professionally (i.e. to satisfy his clients in order to get bonuses, or to protect his reputation), rather than acting to represent all of his shareholders.
This allows the study to be able to judge the merits or the challenges of activist investors to a company’s strategies and their response by the board. Target?s board lacks significant representation of shareholders because the directors are usually nominated from within. We can learn from this case that shareholders who want to nominate new directors can cause controversy. The most obvious lesson is that constant fights between shareholders and companies over these decisions can lead to huge losses. Ackman’s and Target’s fight for control of shareholders created instability, but it also led to the management losing focus on their strategy.
Target was praised as having “superior stock market appreciation and board governance”. Ackman said that advisory firms might have offered a different perspective on Target’s board. They could also have pushed the retailer into exploring new business opportunities. A single-card voting system 3 would be best in class for corporate governance. A voter wouldn’t be able to support both Ackman or Target. In terms of our position, we think that the SEC vote is a positive step in corporate governance. In our opinion, cooperation can produce better results. For example, we believe the solution to the agency problems could be improved by working together. This would improve the transparency of the election process and increase shareholder confidence. Ackman explained in an article that this was not a revolution, but rather an evolution.
SEC says that the primary way in which shareholders can influence corporate policies and hold their boards accountable is to nominate and elect directors. SEC proxy rules have a major impact on shareholders’ ability to influence corporate policy and nominate directors. They are the main way that shareholders can hold boards accountable and make them more responsive to their concerns. Ackman has certainly helped to increase awareness of corporate management and Target’s focus on this critical issue.
Divergence of interest between shareholders and the management is a major cause of agency problems. Companies with large institutional shareholders who own a majority of their stocks are more likely to experience shareholder activism. This is an example of better corporate governance, as shareholders take on the role of owners and voice their concerns. They are often the only shareholders that are aware of all the activities and business operations. Activists complain when the company does not take action to maximize shareholder value. Companies “fear”, such activism can hurt their reputations and sales. Countries that exhibit such activism have lower costs of agency, as shareholders can change things and close the gap between asymmetrical data. It is therefore seen as a way to increase transparency and monitor risks for investors and protect them. According to the situation, shareholder activism may or may not be beneficial for a minority four shareholder.
In some cases, institutional investors will be better informed than a shareholder with a small number of shares. A minority shareholder who is a victim of activist investors can gain from it, because they are more likely to protect his investment if necessary. The minority shareholder will have a conflict with the majority shareholders if he disagrees. Their activism could be very costly. The majority’s activism will inevitably “run over” the minority investors. Minority investor opinions were not included in the Target case.
Ackman was concerned about the share price of Target at the time, and minority investors may have thought the same thing. In this case Ackman’s activism and concern would have been helpful to them. Minority investors could have suffered a lot later, when Akman and Target began to fight. In the first place, this was a conflict that was very costly to Target. Minority shareholders also had the opportunity cost. The conflict also slowed down Target’s decision-making and operations. This example illustrates that shareholder activism may be advantageous or costly, depending on how the company is performing, what the activist behavior is aiming for and when it occurs. Hermes equity is another case where shareholder activism in France has increased. Hermes Equity sued Alstom in 2004 for excessive executive pay. Hermes equity’s aim was to improve corporate management in order to maximize shareholders value.