Considering the major shakeup Bed Bath & Beyond (BBBY -9.94%) just announced for its board of directors, it seems management believes the activist investors pushing for a complete overhaul of the home goods retailer might have a good chance of success.
The home goods retailer announced it was replacing five directors and increasing the number of independent directors, as well as further boosting the diversity of the group, but that may not be enough. The private equity firms pushing for change say Bed Bath & Beyond's actions still fall short, and they plan on forging ahead with their attempt to replace the entire board of directors with new nominees and ousting CEO Steven Temares.
A top-down change
Bed Bath & Beyond's board is seen as stale at best, with co-founders and co-executive chairmen Warren Eisenberg and Leonard Feinstein serving on the board for 48 years, and the tenure of the other directors averaging 19 years, most without any practical retail experience.
Private equity firms Legion Partners, Macellum Advisors, and Ancora Advisors said the board was beholden to its co-founders and allowed the destruction of $8 billion in market value over the entirety of the CEOs' service. The three company leaders have also received some $300 million in compensation since 2015. They say nothing less than an completely reconstituted board, including relevant experience in the industry, is needed, along with a new chief executive.
While Bed Bath & Beyond never really responded to the charges leveled against it, it did begin a comprehensive review of the board's makeup and governance. It apparently found the PE firms were right, because it announced it was making the following big changes:
- Eisenberg and Feinstein will retire from the board and become chairmen emeriti effective May 1
- Lead independent director Patrick Gaston will become independent chairman effective immediately
- Five current independent directors will step down from the board
- Five new independent directors will replace them
- A new committee will be formed to review the retailer's transformation goals
- The audit and compensation committees will be overhauled
As dramatic as the changes are, the hedge funds say they don't go far enough, because they leave Temares in place as CEO without holding him accountable for the degradation in shareholder value; the new board of directors still doesn't include anyone with any retail experience; and there is no action plan offering a strategic vision for the retailer that will change Bed Bath & Beyond's downward spiral.
"We will therefore continue to move forward with our campaign to install fresh, experienced and independent oversight and management at the Company," the three firms said in a filing.
A motivated decision
They've got a point. Same store sales at Bed Bath & Beyond are up only 0.1% annually over the last five years, while gross margins fell over 500 basis points from 39% to 34%, even as expenses soared from 25% of revenue to 30%. The retailer's stock has lost almost three quarters of its value over that same time frame too.
On the one hand, the announcement shows Bed Bath & Beyond was willing to act on the input from investors; but on the other, it only came about because the activist shareholders threatened to throw everyone out.
Because investors have long suffered under the management and guidance of the CEO and board, it was a good time for an outsider to come in with a new plan. Management may have seen the writing on the wall, and it is quite possible the private equity firms will still be successful in their attempt to shake up the board.
Bed Bath & Beyond may have thought that by striking first they could blunt the activist investors' advance, but a plan that is too little, too late may not be a winning strategy in the upcoming proxy battle.