Recently, major shareholders and board members of the legendary, but now troubled, retail chain JCPenney have been fighting over the best direction of the company. 18% shareholder and hedge fund manager Bill Ackman proposes removing current CEO Mike Ullman and opening a search for a new CEO. Meanwhile, Starbuck’s founder Howard Schultz counters that suggesting such a thing is despicable, especially when the company’s current position is Ackman’s fault. Meanwhile, the spat climaxed with Ackman resigning from the JCPenney’s board of directors on August 12th and subsequently divesting his holdings.
While observing this, a friend of mine asked me a question: “Aren’t they both highly motivated to do what’s in the best interests of shareholders? Why are they pulling the company in different directions?” What an excellent question.
Despite appearing to have totally aligned interests, these two can’t seem to agree on anything. Beyond that, they have almost no regard for each other’s opinions. How can that be? Is one of them an idiot? Is Howard Schultz soft? Is Bill Ackman despicable? Certainly, both have been quite successful in their careers. Why the sharp disagreement about the future of the franchise?
There are at least two major reasons why these two do not agree. The first is time horizon. If your objective is to restore JCPenney to its former glory, then your time horizon is “as long as it takes”, and you stand to lose nothing if you are wrong. Conversely, you might come up with an entirely different strategy if your objective is to get the stock price up long enough to get your money out. It is often the case that conflicting time horizons among shareholders lead to sharp disagreements about the right leadership for a company. One might assume that Howard Schultz, as an entrepreneur and former CEO with no financial stake in the company, has a longer time horizon than Ackman who has a huge stake in a good short-to-medium term outcome. As a result, Schultz may be more focused on making hard decisions in the short-term, even if those decisions cause a temporary decrease in the stock price. Ackman, on the other hand, will have to answer to his own shareholders if he takes such a short-term hit, so he has a real incentive to employ a strategy that yields a monotonically increasing stock price.
The second reason is that almost nobody knows what’s in the shareholder’s best interests when it comes to corporate strategy. Specifically, the right answer for JCPenney isn’t actually clear to anybody. When a company goes into a spiral, better execution on the current path will not work. Therefore, a new path must be chosen. Choosing a new path for any company is extremely difficult. Choosing one for a business as old and large as JCPenney is rocket science. When Apple was winding down the drain in the late 1990s, nobody other than Steve Jobs thought that further vertically integrating the product line was the right strategy. Every publication, analyst and reporter considered it self-evident that Apple needed to become more horizontal to compete with “PC economics”. It turned out that the right answer wasn’t obvious. It was so complicated that only the founder of the company and perhaps the greatest CEO of our time came up with it. Certainly no board member or shareholder had the answer.
Similarly, when I was CEO, I radically changed the direction of my publicly held company in 2002. Nearly all of my shareholders promptly gave me a vote of “no confidence” and sent Opsware’s stock plummeting from $2/share to $0.035/share. By 2007, I sold the company to Hewlett-Packard for $14.25/share. It seems that all of my shareholders voted with their wallets and against their own best interests.
It’s not clear that it’s possible for any outside board member or shareholder to have enough knowledge to pick a company’s new direction accurately. I was working 16 hours/day on the problem and I barely knew enough to make that decision. As a result, the best that outside parties can do is vote for or against the CEO. Clearly that’s not easy when you don’t know where the company should be headed.