In a strongly worded letter issued to Sotheby's lead director Friday, the activist hedge fund Marcato Capital Management accused the auction house's board and management of "willful neglect" and demanded both an immediate $500 million share repurchase and the replacement of the company's chief financial officer.
The letter cited poor or nonexistent returns on capital.
"Despite our dialogue with you and other members of the board, a substantial portion of Sotheby's invested capital continues to earn a poor return or worse yet, earns no return at all," wrote Mick McGuire, founder of the $3 billion San Francisco fund company, in his Feb. 20 letter to lead independent director Dominico De Sole. "This willful neglect on the part of both management and the Finance Committee of the board must end urgently."
In a written statement issued Friday evening, Sotheby's responded to the Marcato letter. "The Board welcomes shareholder views and suggestions," said De Sole, "but our immediate priority is selecting a new CEO and determining a strategy to increase shareholder value. We will address capital allocation based on our strategy and the resulting capital needs."
Patrick McClymont, Sotheby's CFO, had no immediate comment on demands for his replacement.
Marcato's broadside is only the latest in a string of activist critiques to be levied upon Sotheby's. The company's shares were up 1.3 percent in afternoon trade after the hedge funds demands were first revealed on CNBC, suggesting that some investors might consider them an overreach—at least for now.
Charles Elson, the University of Delaware finance professor who specializes in corporate governance, said in an interview that De Sole's rationale made sense.
"The key in an organization is the leadership, the CEO, and once a new CEO comes in, you typically see a change in the leadership team," Elson said. "And I think you have to be a little patient until they find someone."
McGuire, however, who with 7.4 percent of Sotheby's shares is its second-largest stakeholder, according to FactSet, disagrees. (Accounting for options he holds that amount swells to 9.5 percent.)
"Shareholders deserve leadership that combines sound business strategy with skilled financial management," he wrote. "For the duration of Marcato's investment, we have enjoyed neither." (With 9.6 percent of the shares, Third Point, the large New York hedge fund, is Sotheby's single-largest shareholder, FactSet reports.)\