Case Study Target Corporation: Ackman Versus The Board

Ackman is an activist shareholder who used his equity stake in Target in order to put pressure on Target’s top management. Firstly, Ackman proposed a real estate sales-leaseback mainly because he believed that “the stock market gave Target no credit for their large and valuable real-estate portfolio. ” Target owned 85%-95% of its stores and facilities, therefore, selling these assets and then leasing the space would create a great amount of value- presenting an opportunity for a buy back. However, this proposal was ultimately rejected by Target along with Ackman’s proposal asking for two board seats. Over time with Ackman’s proposals being rejected one after another he developed opposition in regards to Target’s corporate governance and more specifically their directors - he then launched a proxy fight against Target, as well as increased his pressure on management by nominating a slate of five directors to run in opposition to the reelection of Target directors. He was concerned that Target’s board had no directors with CEO level experiences in either the credit card or real-estate industries - two of Target’s main business creating segments - believing that this lack of experience on the board had negatively contributed to Target’s recent performance. He also stated the current board’s lack of shareholder representation - he argued that Pershing Square (owning 7. 8%) compared to the incumbent board (owning less than 0. 1% of the company) had greater economic motivation to create long-term shareholder value.

Furthermore, as an individual shareholder, Ackman owned more stock than any executive of the company and undoubtedly wanted to see Target succeed in both the short and long-term. Target communicated with the other shareholders by encouraging them to reject Ackman’s slate of nominees and publicly questioned his motives - they did not believe Ackman’s interests aligned with other shareholders because a substantial percentage of Perishing Square’s interest in Target was in the form of derivative securities that was to expire in the next year or so, which would likely cause them to emphasize short-term performance in Target’s stock and disregard longer term success and risk management in order to. In the end Target prevailed and shareholders gave over 70% of their votes to 1 Target’s slate of candidates - however neither Ackman nor Target came out of this proxy fight unscathed as it was costly for both (around $10 million) and Target went through a great deal of uncertainty and board discussions unfortunately surrounded this proxy fight instead of business strategy.

Given the situations described in the case study we cannot say Ackman completely controlled Target Corporation. As we know, shareholder ownership does not imply control of a firm - even by owning the large percentage of shares he did, Ackman could not simply order directors around and still had to face a lot of bureaucracy to have his proposals accepted by the company as there was still the need to face other shareholders and the board of directors. At most, we can say that Target may have to face Ackman in certain situations where he might ultimately have the control, even if by proxy of the other shareholders. Ackman was not a "normal" shareholder of Target Corporation - by owning common stock as well as being a hedge fund manager he was at a position where conflicts of interest could arise. Hedge fund activism, where hedge funds (even when a minority shareholder) ​can exert considerable influence on companies’ decisions, has been growing over the past years - especially in the US. It has been seen as a positive impact for corporate governance as it helps to mitigate the agency problem.

However, it is seen by many as a form of extortion, where hedge funds pressure companies to change certains aspects just for them to obtain returns on their investments. The fact that Ackman was also a hedge fund manager could be the real motivation for Ackman's activism towards Target Corporation. It is clear that his responsibilities towards clients of the hedge fund could have influenced certain decisions he tried to force on the company - for example, by taking decisions that would compromise long term performance just to present short terms benefits as his clients had options on Target's stock that would be worthless in a very short term if the company could not raise its stock price to $35/share. This short-termism was what many expected from hedge fund activism and even if it was not the real motivation for Ackman, ended up being as detrimental as if it was the case. This puts his 2 actions into a new perspective - it is possible that his interests when being an active shareholder came more from a professional side (i. e. satisfying his clients to obtain bonuses or even just reputation) than from the will of representing all shareholders' interests - which was actually one of the points made by Target for shareholders to not side with Ackman in this feud.

Study allows to appraise the merits of activist investor's challenges to the company's strategy and the board's response to it. The general practice of directors being nominated by existing directors created the feeling, among shareholders, that their interests were not being well represented and that indeed, Target´s board lacked significant shareholder representation. Based on this case, we can take several lessons on the controversy that may arise from shareholders wanting to propose new candidates for the board of directors - the most straight forward point we can make is that the constant fighting between between shareholders and the company on these types of decisions can result in huge losses for both parties regardless of the outcome of the fights (in the proxy fight, both sides spent considerable large amounts - around $10 million). Along with the instability created by dividing shareholders between two sides - either for Ackman or for Target - this fight also made the management lose focus on the company strategy, which was something they couldn’t afford given the bad performance of the company during the recession.

The power struggle was unusual because Target had been praised by its “superior board governance” and superior long-term stock price appreciation. However, some advisory firms, acknowledged Ackman, could have brought a fresh perspective to Target’s board and pushed the retailer to explore new business opportunities and although the nominees of each part had impressive qualifications, Target could benefit from some “new blood”. Also employing a single card system 3 would reflect best-in-class corporate governance - without one, a voter could not support both a Target nominee and an Ackman nominee. Regarding our standing point, we believe that SEC vote was a step towards good corporate governance practices. We believe that something better can arise from cooperation between the parts, taking for example, the agency problem - these changes could significantly enhance the confidence of shareholders and make the election process more transparent. As Ackman stated in one interview regarding this subject, “We're not talking about revolution, but evolution".

Also, according to SEC, ​“The main way shareholders can hold boards accountable and influence matters of corporate policy is through the nomination and election of directors. The ability of shareholders to effectively use their power to nominate and elect directors is significantly affected by SEC proxy regulations because, as has long been recognized, a federally-regulated corporate proxy solicitation is the primary way for public company shareholders to learn about the matters to be decided by the shareholders and to make their views known to company management. ” - in the end, Ackman certainly raised awareness of corporate governance, and likely helped Target to be more focused than ever on this important issue.

Agency problems arise from a divergence of interests between management and shareholders. Shareholders activism arises in companies with institutional investors who hold a big share of the stocks. It is a way for better corporate governance - shareholders act like owners of the company and raise their concerns. These shareholders are usually the ones who are always aware of the company activity and operations. When management does not act to maximize shareholders’ value, activists start complaining and asking for their demands to be taken into account. Companies “fear” such activism because it can harm their reputation and their sales. Countries with such activist behavior, therefore, have lower agency costs since shareholders hold the power to change and narrow the gap of asymmetric information. Therefore, it is considered as a source of transparency and monitoring to protect investors’ risks and help them increase returns. For a minority 4 shareholder, shareholders activism can be a good or a bad thing depending on the situation and the position they hold.

For instance, a shareholder can hold few stocks in a firm will not be as well informed as institutional investors. If these investors engage in an activist behavior, this minority shareholder can benefit from that since these bigger shareholders have more to lose than he does, consequently will protect his investment when needed. However, this situation is going to be a source of conflict if the minority investor disagrees with the other shareholders since their activism will be costly for him. Minority investors will then be “ran over” by the majority investors’ activism. In the case of Target, minority investors’ opinions are not given directly in the case.

At the beginning of Ackman’s concern after a decrease in Target’s share price, minority investors could have had the same thoughts as Ackman and this case his concern and activist behavior would have helped them. However, later when the conflict between Target and Akman arouse this could have been costly for minority investors. First, this conflict was exceptionally costly for Target, consequently the minority investors also had to bare the opportunity costs. Additionally, the conflict was a source of slower decision making and consequently operations of Target. This example shows that shareholders activism can be beneficial or costly depending on the state of the company, the aim of the activist behavior and the timing. Another example of shareholder activism on another country is the case of Hermes Equity - in France shareholder activism has been growing. In 2004, Hermes Equity were engaged in a lawsuit against Alstom company because of its excessive executive remuneration. The goal of Hermes equity was to ameliorate corporate governance in order to maximize shareholder value.