The hot move for activist investors: Pushing out CEOs

Klaus Kleinfeld.
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No CEO is safe.

Among the most popular tactics being used by activist investors of late is to oust companies' chief executive officers — an approach so prevalent that there have been several developments in the last week alone.

In some cases, activist investors are arriving on the scene with their own replacement CEOs at the ready. In others, they're encouraging chief executives to retire, and then placing themselves in the middle of the search process for the next leader.

The trend may also be related to the recent rally in the markets, according to Josh Black of the research firm Activist Insight. He said that breakups and buybacks – the more traditional activist plays – have less upside at the top of the market than at the bottom, so seeking operational changes, such as getting rid of the CEO, makes more sense right now.

Take Arconic, for example. Activist firm Elliott Management seeks to overthrow Klaus Kleinfeld, current CEO of Arconic, which sells metal products to the transportation and energy industries. Elliott revealed it is the largest holder of Arconic, with a stake of more than 13 percent in the $13 billion company.

Elliott teamed up with Larry Lawson, former CEO of Spirit AeroSystems, saying in a letter this month that Lawson has the skills to "lead a turnaround of Arconic's woefully underperforming business." Arconic has defended Kleinfeld and questioned Elliott's "shifting numbers, data sources and valuations" related to the investor's diligence of the company.

CSX, Tiffany and more

Experts caution that it's far more difficult for an activist to remove a CEO than it is to install directors. That's why some activists have sought to replace the CEO when the existing leader is near retirement.

Paul Hilal, who recently founded an activist firm, Mantle Ridge, took a stake in CSX. He is working with Hunter Harrison, a railroad turnaround expert who was previously CEO of Canadian Pacific.

The goal for the team is to install Harrison as CEO of CSX. After Hilal's investment, CSX Chairman and CEO Michael Ward said he'd retire effective May 31. But that hasn't guaranteed Harrison the top spot just yet.

Currently, the negotiations are stuck over Harrison's contract, though Hilal said last week in a letter to the company's board that he would adjust some demands in exchange for a guaranteed four-year contract for Harrison. CSX has put details such as compensation and board composition up for a shareholder vote.

Jana Partners last week disclosed a settlement with Tiffany & Co., weeks after its CEO Frederic Cumenal stepped down. Jana's settlement included putting three directors on the board: Francesco Trapani, former CEO of Bulgari; Roger Farah, co-CEO of Tory Burch and former president and COO of Ralph Lauren, and James Lillie, former CEO of Jarden. Trapani, who also took a stake in Tiffany, was appointed to help lead the company's CEO search process.

Meanwhile, there was another recent example of an activist firm revealing a stake just as a CEO is on the way out. This time it was at Tribune Media, where Peter Liguori said last month that he would step down in March.

Last week, Starboard Value, an activist investor, said it had taken a 6.6 percent stake in the company. It's likely that Starboard will encourage the board to hire a CEO with operating experience who can improve margins, according to a report by 13D Monitor.