It's time to move on. Abercrombie & Fitch (NYSE:ANF) wisely decided it was better to switch than fight, and agreed to appoint to its board four new independent directors, a move recommended by activist investor Engaged Capital.
The looming proxy battle was gearing up to be a costly distraction for the teen retailer after the hedge fund operator very publicly opposed the path management set the company on and the man they chose to lead it forward. Yet with the rapprochement, the two sides have effectively set aside their differences and are looking toward the future rather than the past. And, fortunately for CEO Michael Jeffries, it's one that still includes him at the helm.
The agreement reached between Abercrombie and Engaged was the culmination of a long-simmering dispute over the retailer's long-faltering performance, the board's unwillingness to take corrective action, and the distraction Jeffries had become. The hedge fund charged that Abercrombie's leading position in teen retailing had not translated into returns for investors and that failure was a consequence of those running the business. Having lost confidence in Jeffries to do what was necessary to fix what was broken, it called for his ouster.
Instead, the board thumbed its nose at Engaged, adopted a poison pill defense to further entrench management, and then signed on Jeffries to a new contract months ahead of when it was necessary to do so. But it also began to reel in the worst excesses, clipping Jeffries' wings by splitting the role of chairman and CEO and saying it would appoint three new independent directors. Although those were steps in the right direction, the hedge fund wanted more and launched a proxy fight to have five candidates elected to the board.
I'll admit to thinking Engaged had an uphill climb in its battle. Although its arguments for change were seemingly sound, with a less than 1% ownership stake in the company, it didn't seem the hedge fund could mount an effective campaign, yet the agreement announced the other day proves it's possible to enable change with a persuasive argument.
The teen retailer agreed to nominate three retail executives and a former global director of retail for Ernst & Young. In return for the hedge fund ending its proxy fight, Abercrombie will nominate Bonnie R. Brooks, vice chairman of the Hudson's Bay Company; Sarah M. Gallagher, a former executive at Ralph Lauren; Diane L. Neal, the former chief executive of Bath & Body Works; and the accounting firm's Stephanie M. Shern. .
But to allow the new members to be seated without a fight, four current members had to agree not to stand for reelection. They were Lauren Brisky, a former Vanderbilt University executive; Kevin Huvane, a partner at Creative Artists Agency, an entertainment and sports agency; Jack Kessler, a real estate development company executive; and Elizabeth Lee, a private school administrator.
The new additions mean 11 of the board's 12 directors are considered independent, but more important, it will now be comprised of individuals with actual retail experience. While Michael Jeffries won a reprieve as well with the deal, Engaged Capital has done Abercrombie & Fitch shareholders a favor by clearing the decks, holding management's feet to the fire, and focusing the board's gaze on its future.
Editor's note: A previous version of this article stated that the new directors were nominated by Engaged Capital. The Fool regrets the error.
Rich Duprey owns shares of Abercrombie & Fitch Co. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.