Peer-Group Performance Could Be An Issue For Some Boards

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Phillips 66’s situation is a reminder that evaluating performance versus peers can be significant for the following reasons.

The end of the year generally signals a time for self-evaluation, but for corporate boards, it can also trigger shareholders who might want to compare their company’s performance with other companies in their peer group. Sometimes, even when a group of corporate directors presides over a healthy increase in stock price for their company, shareholders believe they should have done better because of gains achieved by their peers. It’s the end of the year – has your company performed as well as its peers?

Unfortunately for the Phillips 66 board, Elliott Investment Management wasn’t satisfied with the 13% year-to-date stock price increase that was recently reported by CNBC in November. Instead, the activist investor took a $1 billion stake in the energy company and began a campaign aimed at retooling the Phillips 66 board and making improvements to boost company performance. In a letter to the board, Elliott executives outlined “Phillips 66’s underperformance, the magnitude of the value-creation opportunity at hand – which we believe could be approximately 75% of upside from today’s stock price (or greater than $200 per share) – and the steps that Phillips 66 needs to take to deliver on that opportunity.”

It was underperformance against companies in its peer group that moved Elliott to act against the board. Fellow energy company Marathon Petroleum gained nearly 29% year-to-date compared to Phillips 66’s 13%.  In another unflattering comparison, energy company Valero showed virtually no gain year-to-date, but over the past three years, outperformed Phillips 66 124% to 88%. Elliott has proposed adding two board members with refining-operating experience, which would give it two seats on the board, which currently has 13 members.

In certain industries, failing to achieve performance comparable with other companies in the same peer group might place the directors on the boards of those companies under greater scrutiny. In the case of Phillips 66, it appears that Elliott has done some due diligence, outlined steps it believes can be taken to improve performance and is willing to give the current board an opportunity to execute a plan to turn things around. That may not be the case for every company board that doesn’t perform positively against its peer group. Phillips 66’s situation is a reminder that evaluating performance versus peers can be significant for the following reasons:

• Measuring peer performance could be a barometer for how the industry is dealing with market conditions.  If economic or market conditions affecting an industry are depressing results, but your company is outperforming, it may be an indication that management and the board have read those conditions well and deserve credit. If an entire industry is doing poorly, shareholders may be more easily convinced that the board is not entirely to blame for the momentary lapse in growth.

• Evaluating peer performance can help boards find what works well and not so well in their industry. There is value in studying your competitors. Boards shouldn’t shy away from understanding why they are outperforming or underperforming their peers. Determining what other companies are doing to excel in your industry can yield helpful information to improve company operations. It also allows for comparisons and evaluations of different approaches to similar challenges and their results.

• Tracking peer-group activities can be helpful in negotiations with shareholders. Awareness of trends within your peer group could be helpful in persuading shareholders that certain measures may not need to be adopted, since your peers have not done so. In limited circumstances, there could be benefits to moving ahead with industry changes as a group as opposed to becoming the first to initiate new initiatives backed by shareholders.

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