The Deal Magazine: The Wrong Target
Published on May 12, 2009
Pershing Square Capital Management LP‘s William Ackman is waging a proxy fight against Target Corp. to replace four of the company’s independent directors with four of his loyalists and himself. Ironically, Ackman is attacking Target’s three greatest strengths: governance, integrated merchandising, and value creation.
Ackman has chosen the wrong Target.
Having served on Target’s board from 1993 to 2005, I can attest to the independence of the board, its financial discipline, and its commitment to sustained increases in shareholder value.
Let’s examine Target’s record in each of the areas Ackman is challenging:
Board governance. Ever since the Dayton family, led by former CEO Kenneth Dayton, took their company public in 1967, Target has been known for its superior board governance. Dayton’s 1984 Harvard Business Review article became the national model for governance and the basis for many provisions in the Sarbanes-Oxley bill. Twenty-five years later Target’s board governance principles remain essentially unchanged, and its board is consistently ranked one of the best in the U.S.
Ackman has picked an odd target in attempting to replace the Target board. It is one of the strongest, most committed boards in the country. In order to reflect the diversity of its customer base, Target’s eleven independent directors comprise four women and three minorities, with CEO Gregg Steinhafel as the only inside director.
Ackman is off base in suggesting that the Target board lacks relevant expertise, with no CEO-level expertise in retail, credit cards and real estate. Target’s board includes financial experts with real estate and credit card expertise like Richard Kovacevich of Wells Fargo & Co. and Jim Johnson of Fannie Mae, and marketing experts General Mills Inc.‘s Steve Sanger, McDonald’s Corp.‘s Mary Dillon, and Coca-Cola Co.‘s Mary Minnick.
In the last fifteen years the wisdom and unity of the board has guided the company through economic downturns, successful CEO successions, the timely and profitable spinoff of Marshall Field’s and Mervyn’s LLC, and expansion of Target stores into a national franchise.
Why would shareholders want to destroy the board’s independence with directors loyal to Ackman, rather than to all of Target’s shareholders?
Integrated merchandising. Thanks to the merchandising genius of former CEO Bob Ulrich and current CEO Steinhafel, Target has emerged as the only mass merchant to compete successfully with Wal-Mart Stores Inc. During his 14 years as CEO, Ulrich was the nation’s most successful retail executive, with Steinhafel as his top merchandising expert.
Target’s retail strategies have been successful because they meticulously integrate retail, real estate and credit cards into consumer-friendly, family-focused offerings. Management carefully controlled real estate to ensure it could execute without compromise its “big box” retail layouts. The Target credit card became an integral part of its merchandising offerings, including contributions of one percent of purchases to customer’s local schools. Were Target to follow Ackman’s recommendations, it risks losing control over its real estate and credit cards, and hence its merchandising strategy.
Shareholder value creation. Target shares have gained 630% since Ulrich was elected CEO in 1994, compared with 280% for arch-rival Wal-Mart. The record speaks for itself.
Enter Ackman, who began buying Target shares in March 2007 just before the market peaked. He immediately began pressuring the Target board to engage in financial engineering by spinning off its credit cards and its real estate. His proposals ignored the lessons of failed retailers like Sears, K-Mart, and Mervyn’s that fell by the wayside after they made similar moves. The board agreed to sell 47% of its credit card business to J.P. Morgan Chase & Co. Then Ackman insisted that Target spin off its real estate with very high rent costs. The Target board concluded that implementing Ackman’s plans would put its balance sheet in jeopardy.
That’s when Ackman launched his proxy fight and began attacking Target’s board. His motivations in trying to take over the board are questionable. He has disappointed his investors, as he has lost 50% in one Target fund and 90% in another. Is the proxy fight his attempt to save face?
This isn’t the first time outsiders have taken a run at Target. In 1987 the Dart Group launched an unsuccessful attack on the company, and in 1995 J.C. Penney Co. also did.
If we have learned anything from the recent economic meltdown, it is that financial engineering strategies like those advocated by Ackman rarely create long-term, sustainable shareholder value. Target is an example of the best of American business, the kind of innovative, customer-oriented company we need to rebuild our economy. If Ackman won’t back off voluntarily, Target shareholders should sent a strong message by soundly defeating his slate.
Bill George, the former CEO of Medtronic, is professor of management practice at Harvard Business School. He serves on the boards of Exxon Mobil and Goldman Sachs. His new book, 7 Lessons for Leading in Crisis, will be published in early September.
Originially Posted On: The Deal Magazine