Last week, activist investor Bill Ackman precipitated a new wave of drama at troubled retailer J.C. Penney (NYSE:JCP). Ackman -- whose Pershing Square hedge fund has been the largest investor in J.C. Penney for the past three years -- released an open letter to the company's board complaining about the slow pace of the CEO search process.
Ackman raises some valid concerns. If current (and former) CEO Mike Ullman is meant to be an interim leader, the company should be moving quickly to find a permanent candidate who can lead the company's turnaround.
However, Ackman has been instrumental in making the decisions that led to J.C. Penney's downfall. As a result, he has lost the credibility necessary to be an effective activist investor. The board's cool response to his complaints is thus very understandable. Unfortunately, Ackman's belligerence is likely to further destabilize J.C. Penney.
Bill Ackman has been actively involved in the management of J.C. Penney since joining its board of directors in early 2011. Indeed, as I discussed back in April, Ackman has had a hand in most of the major decisions that ultimately led to the dire situation he describes.
Ackman helped recruit former CEO Ron Johnson and provided "cover" for him for more than a year, despite J.C. Penney's poor performance during that time. Ackman also helped orchestrate a $900 million share buyback in 2011, depriving the company of capital it desperately needs now. He even called Mike Ullman "the right guy at the right time" when J.C. Penney rehired its former CEO just a few months ago. Bill Ackman has thus had an extraordinary level of influence at J.C. Penney.
When J.C. Penney's board introduced Ullman as the new CEO this April, he was not labeled an "interim" CEO. However, according to Ackman, Ullman was not supposed to be a long-term CEO; rather, his job was to stabilize the company while the board searched for a turnaround expert to lead J.C. Penney. Ackman is now angry that Ullman has made hiring decisions and other strategic choices that are not appropriate for an interim CEO. Ackman further argues that the board is moving too slowly in its search for a permanent CEO.
After Ackman made his complaints public, J.C. Penney Chairman Thomas Engibous quickly shot back that the board is satisfied with Ullman's performance. Moreover, Engibous made it clear that while the board is looking for a permanent replacement, it is not in a rush.
This response did not sit well with Ackman, who responded with another letter alleging that Ullman is putting his own career ahead of the company's best interests and that Engibous and a few close associates have hijacked control of the board by keeping Ackman and other company directors in the dark about some important decisions.
Ackman therefore recommended that Engibous be removed as chairman and replaced with former J.C. Penney CEO Allen Questrom. He also requested more information related to the company's financial position, stating that he had been cut off from information he needed to fulfill his fiduciary responsibilities as chair of the finance committee. Predictably, Engibous denied Ackman's allegations and countered that the board is following proper governance procedures.
It's hard to know exactly what's going on in the boardroom at J.C. Penney. Clearly, Ackman and Engibous do not see eye-to-eye, and there may be other cliques forming within the board. At least some of Ackman's complaints seem legitimate. For example, the board has now made it clear that J.C. Penney is searching for a new CEO. Given the urgency of J.C. Penney's problems, this search process probably should have moved faster.
However, Ackman does not have the credibility to be a serious shareholder advocate anymore. His rash decisions helped lead J.C. Penney to this juncture. Accordingly, it's hard to fault the board for shifting to an ultra-cautious approach and discounting -- or even ignoring -- Ackman's advice.
Regardless of who is right or wrong in this dispute, one thing is clear: J.C. Penney is not a good investment candidate today. The company's financial position is lamentable. Moreover, J.C. Penney has become a pawn in a petty struggle between various board members. The results are not likely to be pretty.