The recent letter sent by activist investor Elliott Management to the Southwest Airlines board of directors is a reminder that corporate boards do not have an unlimited amount of time to demonstrate that they are assisting management in the execution of a turnaround plan. Southwest shareholders expect the board to refresh its members with skilled and experienced directors who are capable of making significant adjustments that will improve company performance even in the most difficult economic environments. Since shareholders don’t believe that has happened, they are looking to replace two-thirds of the board.
Frustrated that the discount airline’s stock price has decreased approximately 46 percent over the last five years, Elliott has been acquiring more shares of the company to put it in a position to negotiate change with current leadership or force change by initiating a proxy fight for control of the board. According to a Reuters news report, Elliott and Southwest will meet on September 9 to discuss solutions.
Already, Elliott has publicly said it plans to nominate a slate of 10 directors to Southwest’s 15-member board. Former Virgin America CEO David Cush and former Air Canada CEO Robert Milton are among candidates Elliott has selected for the board overhaul. The activist has also publicly called for the removal of current Southwest CEO Robert Jordan and executive chairman Gary Kelly from the board to prevent the duo from continuing to “control Southwest, on their terms, for as long as they wish.” Additionally, Elliott has proposed the formation of a special board committee that would review Southwest’s business operations and come up with a plan to drive “transformational change” at the airline.
It should be noted that CEO Jordan has said that there is a great plan to turnaround the troubled airline. Unfortunately, the timeline for the execution of the “turnaround” is beyond what investors like Elliott are willing to tolerate.
In general, activist investors have become more aggressive when targeting board members that are perceived to be hindering positive change at companies. However, in this case, investors waited patiently through five years of poor performance before sending a letter to the board. Most boards will not get a five-year grace period to devise and implement a turnaround plan. The situation at Southwest has become combative. Corporate board members observing what’s taking place might consider asking their board:
What mechanisms do we have to challenge ourselves about poor stock price performance? Five years of declining stock price performance with minimal action from the board is an invitation for activists to challenge the board. For this reason, boards must be willing to challenge themselves about their ability to provide acceptable levels of performance. Agreed upon standards for how long a lag in stock price performance will be permitted before a major effort to turn things around will be mounted should be set. Similarly, agreement on how steep a drop in quarter-to-quarter or year-over-year performance requires swift action should be reach as well. Measures should be implemented that ensure that action will be taken when these markers are reached. Then, each board must have the integrity to follow through.
If performance is lagging, how do we determine if a board refresh would be helpful? Self-evaluation is a difficult thing, but all boards must be willing to do it. When things aren’t going well, one option is to make changes to the board that can get things back on track. Southwest took too long to add to their board and now 10 members of the board are at risk of losing their positions.
New perspectives can be very helpful. Boards should consider being open to the idea of asking shareholders what type of additional experience they believe would strengthen the board. Collaborations like these could delay calls for a proxy fight. Alternatively, boards could study the makeup of the boards of their peer companies that have achieved positive results. They may find that the boards of their competitors have skill sets that they lack.
Do we really have a turnaround plan, if key shareholders haven’t bought in? If the shareholders are not on board, most management plans will encounter problems. It’s hard to turnaround a company if you can’t convince shareholders your plan has merit. If the company needs a turnaround plan, the board has already lost some investor confidence. Getting shareholders to buy into the plan is a significant part of the “turnaround.”
