Gannett and Legg Mason: How Board Strategy and Composition Can Make a Difference

Two boardroom battles in May demonstrate how important the clear communication of business strategy is when fighting off challenges from activist investors.Two boardroom battles in May demonstrate how important the clear communication of business strategy is when fighting off challenges from activist investors. In the case of Alden Global Capital’s MNG Enterprises’ hostile takeover attempt of Gannett, clear communication of a long term plan for change and vision for the future won the support of investors and industry analysts, and stymied efforts to vote corporate directors off the board. In the case of Trian’s attempt to gain board representation at Legg Mason, the lack of a clear plan and vision to modernize operations and cut costs led to the addition of two directors from Trian and the replacement of three incumbent directors. In both cases, each board’s ability, or inability, to sell its current composition and business strategy made all the difference.

Gannett issued a statement emphasizing this point shortly after its shareholders re-elected the company’s slate of chairman John Jeffry Louis, John E. Cody, Stephen W. Coll, Donald E. Felsinger, Lila Ibrahim, Lawrence S. Kramer, Debra A. Sandler and Chloe R. Sladden to its board of directors at its annual shareholder meeting on May 16. The vote ended MNG Enterprises’ bid to seat its own slate of candidates on the Gannett board in a $1.4 billion hostile takeover attempt that began in January.

In the statement, Gannett said, “Consistent with the interactions with our investors leading up to the meeting … Gannett shareholders recognize the continued progress we have made toward our ongoing digital transformation and agree that our strategic plan is the best path to deliver value for all Gannett shareholders. Our shareholders also understand that the broad and diverse backgrounds, professional experiences and skills of our directors make them uniquely qualified to oversee Gannett’s achievement of its strategic objectives and transformation plan.”

The Gannett board did a better job of convincing shareholders of its ability to execute a digital transformation plan that would lead to greater value than MNG Enterprises’ efforts to convince investors that a management change would produce faster and better results. To strengthen its argument, Gannett highlighted shortcomings of MNG Enterprises’ board candidates (which included potential conflicts of interest) and the company’s sketchy track record handling transformations of previous acquisitions. When proxy advisory firm Glass Lewis refused to endorse any of MNG’s board candidates and ISS only endorsed one, Gannett shareholders sided with their current board in spite of a $12 per share offer which represented a 40% premium at the time.

While communication of its business strategy and the makeup of Gannett’s board were enough to gain the confidence of the majority of its key shareholders, almost the exact opposite was true for Legg Mason’s board.

Legg Mason’s board left itself open to an activist challenge from Nelson Peltz’s Trian Fund Management due to poor share price performance and the lack of attention to board refreshment. Analysts criticized the money management firm for failure to adjust its focus on active fund management to include low-cost and passive investing strategies of competitors like Schwab and Vangard. It has been reported that the company’s shares had lost 4% per year over the last five years, before surging 37% so far this year. While performance has improved and the company has announced plans to cut costs by $100 million over two years, the slow reaction to change made a negative impression on the markets.

Trian’s successful track record turning around financial services firms combined with Peltz’s previously successful stint on Legg Mason’s board (from 2009 to 2014), made the fund manager an inviting target. After allowing five years of losses since Peltz’s departure, and having allowed two directors to reach the retirement age threshold, it would have been difficult for Legg Mason’s board argue that changes were not needed. Rather than engage in a full blown proxy fight, Legg Mason reached an agreement with Trian (which owns 4.5% of the company’s shares) to add Peltz and Ed Garden to its 10 person board, and replace three sitting directors with three new independent directors at the company’s upcoming annual meeting.

By adding Peltz, who is familiar with the company’s challenges, and refreshing the board with independent directors who can help execute the new business strategy, the company has a more positive story about the company’s future growth potential to communicate to shareholders and analysts. Confidence that the firm will meet its cost cutting goals has likely increased with this move, helping to secure this year’s share price rebound. In the long run, the Legg Mason board can claim some credit for having the good sense to change the composition of the board for the benefit of the shareholders. That’s a strategy few would argue with.

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