If Jim Mitarotonda launches a director fight at the parent company of Victoria’s Secret and Bath & Body Works he would have a lot of easy overtenured boardroom targets.
Barington Capital‘s Jim Mitarotonda may soon launch a director fight to split Victoria’s Secret owner L Brands Inc. (LB) into two publicly traded companies. If he does, it is likely that he may have some success, considering the many vulnerable directors on the company’s 12-person board.
Mitarotonda hasn’t threatened a proxy fight though he has urged L Brands to replace directors, which suggests a director contest fight could emerge. Governance experts contend that corporate directors on boards overseeing the same CEO for several years might be vulnerable to an activist attack. That’s due to a perception they’re potentially too chummy with the CEO and management to provide adequate oversight.
According to relationship mapping service BoardEx, a service of The Deal, there are at least three directors at L Brands who fit that category. They are David Truman Kollat, who chairs L Brands’ compensation committee and has been on the company’s board for 43 years, since 1976; Allen Roger Tessler, the lead independent director and chair of the nomination and governance committee, 32 years; and Raymond Zimmerman, 35.2 years. Kollat, Tessler and Zimmerman are 80, 82 and 87 years old, respectively, according to BoardEx.
Les Wexner founded the Limited in 1963 with a store in Columbus, Ohio, and drove its massive growth over the past half-century. However, the company’s share price has been on a steep downward trajectory since 2015. Also, Abigail Sara Wexner, the wife of the CEO-founder, is on the board as a nonindependent director and Dennis Hersch, a business adviser to the Wexner family, is a nonindependent director.
“Having three people at 80 years old or more is troubling,” said University of Delawareprofessor Charles Elson. “At 80 you are way beyond your length of service, and having a spouse on the board is troubling as well. You could be bright and talented, but the relationship raises questions of oversight. Overall it looks like [Les] Wexner controls the company.”
Kollat, the compensation subcommittee chief and a former executive vice president of marketing and strategic planning, was a key corporate executive that helped drive L Brands growth over the years. However, influential proxy adviser Glass, Lewis & Co. LLC gave L Brands a D rating in its “pay for performance” analysis, according to a report obtained by The Deal. The report, Kollat’s tenure on L Brands’ board and the company’s stock price woes suggest that investors could target him too.
Elson contends that Kollat’s more than four decades of service is far too long. “No one should serve on a board for 40 years,” Elson said. “You are so part of the establishment that it is very difficult to intervene if there is a problem. There is a lot of talent in the world. There have to be other people out there with equal talent and capability.”
Another L Brands director, Elwood Gordon Gee, is considered independent and has sat on the board for 23.8 years. However, Wexner and Gee have had a long-lasting relationship that suggests he too many not provide an independent check on L Brands’ management. According to BoardEx, Wexner and Gee both spent time together at various roles at Ohio State University, Abercrombie & Fitch Co.‘s (ANF) board and the Wexner Center for the Arts.
Gee was president of Ohio State University between 2007 and 2013 and 1990 and 1998. During portions of Gee’s tenure as the university’s president, Wexner was chairman of Ohio State University’s board of trustees. In 2011, while Gee was president, the university received a $100 million philanthropic gift from Wexner, his wife and the Limited Brands Foundation. Also, the two overlapped on Abercrombie’s board in the late ’90s, when Wexner was board chairman and Gee was a director, according to BoardEx.
“Their relationship raises serious independence issues,” Elson said.
Separately, Bob Evans Farms Inc.‘s board in 2014 removed Gee following pressure from activist Tom Sandell, who at the time was pushing for M&A at the fast-food chain and its BEF Foods business. Gee resigned from Ohio State’s board in 2013 reportedly following controversial statements he had made.
Activist investors don’t target companies because they have a corporate governance problem. However, corporations with share price performance problems, board independence and tenure issues could make a good target candidate, especially if the activist has a more qualified slate of director nominees and a strategy for improving value.
At this stage, it is unclear if Barington’s strategy for breaking up the business is the right thing to do in the long term. The insurgent investor has had much success employing activism and driving M&A in the apparel space.
Even so, Credit Suisse analyst Michael Binetti wrote Thursday, before the campaign’s launch, in a note cited by The Deal that “we see little chance of [L Brands] splitting [Victoria’s Secret and Bath & Body Works] at this time,” saying “Victoria’s Secret would be left with no clear growth drivers (e.g. no Athleta to add some positive tailwinds), and with competitor share gains accelerating and margins that are likely poised to go much lower before improving.”
Wells Fargo analysts, meanwhile, made their case for a breakup of L Brands, noting that much of the company’s focus has been on the “struggling concept,” Victoria’s Secret, instead of on growing Bath & Body Works, a higher-margin more niche player.
It is possible that L Brands could convince institutional investors to try to keep Victoria’s Secret and Bath & Body Works intact. However, to do so would at the very least require a major board overhaul either on its own or as part of a settlement with Barington.
L Brands did not return a request for comment.
– Alexandra Garfinkle contributed to this report.