Bill Ackman's August 9 letter to JC Penney's board
Bill Ackman has sent another letter to JC Penney's board, demanding an immediate board meeting and a new board chairman.
The text of that letter follows:
To My Fellow Directors:
I think JC Penney is at a very critical stage in its history and its very existence is at risk. During a period like this one, it is absolutely critical that we work together to solve our problems. It is essential that our board function extremely effectively or we will certainly fail. In my history as a board member of many public companies over the last 15 years, I have never before released a public letter to a board of which I was a current member. That was admittedly an extraordinary step, but you should understand that I did so as a last resort after attempting to negotiate a resolution of my concerns about the recruitment process with our Chairman and the Company's advisors over the last week. After having read the board's public response to my letter and considering the events of the last few weeks, I am concerned that a small subset of the board is negotiating and speaking on behalf of the full board, that the rest of the board has not been properly informed and has not been given an opportunity to express its views, nor is even included in deliberations about what to do.
A proper functioning board needs to be fully informed about all material facts about a corporation in order to make deliberate and intelligent decisions. Extreme candor among directors is critical. Directors need to hear from one another in an open forum so all issues can be aired in a transparent fashion.
Directors must put personal relationships and issues aside that might color their decision-making process. The board must be led by a Chairman who is unbiased, can make decisions without regard to personal relationships, and focused only on what is best for the corporation.
In recent weeks, our board has ceased to function effectively.
Material information is not being properly shared with the board, and the board does not have access to independent advice.
As the Chairman of the Finance committee, I need to have full access to the financial affairs of the corporation in order to help lead the board in making critical financial decisions in fulfilling my fiduciary duties. When Mike became CEO, he terminated Alix Partners and cutoff Blackstone from access to information and a role in assisting us in analyzing the current state of affairs. My team was similarly cut off from access to information. This is despite the fact that when I joined the board, the Company explicitly agreed in writing to allow the Pershing Square analysts access to information so that they could assist me in analyzing the financial affairs of the Company. Alix Partners and Blackstone were hired by the Board to assist the Board in its deliberations and to help the Company in controlling cash, expenses, and future commitments. It was entirely inappropriate for Mike to terminate the board's advisors without the board's knowledge or consent. We are now flying blind.
While I like Robert Pruzan and Centerview, they are Mike's advisors, not the Board's financial advisors. They are conflicted, therefore, in providing independent financial advice to the board. Robert is therefore not likely to recommend that Mike should be terminated, nor is he going to criticize any decisions that have been made by Mike. He is not going to show us projections that would lead one to the conclusion that management should be changed. We are therefore not able to receive the objective advice that we need in order to make intelligent decisions.
Bob Peterson and Susan Ray were very helpful to me and my team and the board in understanding what was going on J.C. Penney.
I, and I believe, the rest of the board thought very highly of both of them. Once Mike became CEO, Bob and Susan said they were no longer authorized to answer our questions. When I confronted Mike directly, he reluctantly agreed to allow Bob and Susan to speak to my team. Last week, Bob was constructively terminated (his strategy position was eliminated and he was offered a middle-tier position in the finance department, so he quit). I was told that Susan was fired last week. I do not know the basis for her termination.
Material hiring and firing decisions are being made without the board being properly consulted. Our marketing has been a major problem. I thought we had begun to make material progress when Sergio was brought in as a consultant. Marketing messages were tested. Data were generated to determine ROIs of our various campaigns. Traffic was recovering, Mother's Day was strong, and we appeared to be recovering. Unfortunately, Mike fired Sergio without the board's consent. He has now hired Debra Berman, a friend of Mary Beth's from Kraft. No other candidate was considered for the position as far as I know.
Up until Mike's current tenure, there was a process for hiring executive officers. They would be vetted, at a minimum, by the compensation committee, and their package would be considered by the committee and recommended to the board for its approval. In light of the fact that Ms. Berman is a friend of a director, particularly one who is Chairing the search committee, this new executive's hiring should be analyzed with greater scrutiny.
Sometimes CEOs hire friends of directors in order to curry favor with those directors. While I am not suggesting that this is what has happened here, proper process was not followed in this personnel decision.
Furthermore, in light of the criticality of this role and the difficulties we have had in this area, one would reasonably have assumed that the full board would have had the opportunity to interview Ms. Berman. That could easily have been accomplished at the last board meeting for apparently her hiring was being negotiated at that time. As Allen Questrom pointed out in his interview on CNBC yesterday, the decision to hire a consumer packaged goods marketing executive as the CMO of J.C. Penney is a strange decision. The skills and experience one learns from marketing lunch meats and American cheese to consumers are not logically applicable to marketing JCPenney to our customer base.
Imagine my surprise when I learned of Ms. Berman's hiring from a press release on my Bloomberg machine. Unless the compensation committee met to consider Debra without me, Mike hired Debra without the approval of the comp committee. I and other directors still do not know how much she is being paid, how much equity she has been granted, etc. This is entirely inappropriate in my view.
I am very concerned about personnel decisions that are being made without the board being asked for its consent or even notified. It appears to me that a lot of other qualified people have been terminated, individuals with no experience in a particular function are given important roles in that area, and that some very questionable hiring decisions have been made.
For example, at the last meeting, Mike mentioned that he had made a member of the merchant team head of real estate and construction even though she has no background in real estate or construction.
When Mike first joined as our interim CEO, he told me that he intended only to hire one or two people total. This made sense to me because interim CEOs do not make many material hiring decisions (those are left for the new CEO) and instead focus on recruiting a new CEO. While the board agreed that it would take the 'interim' out of Mike's title to assist him with working with the team in Plano, Mike was hired by this board as an interim CEO. He has not acted like one. When Mike was asked about succession at the last board meeting, he said that he did not know of any other executive who could run the Company. I learned yesterday from an analyst that Mike had told her and the other members of the analyst community that he was not an interim CEO, but the board's long-term choice.
Mike provided the analyst community with false information. That explains why the analyst community was so surprised yesterday to hear that the board had started a search process. If Mike had told the truth that he was indeed an interim CEO, there would be no disruption in revealing that a search process was underway.
Compare how Mike has handled the situation with A.G. Lafley, the interim CEO of P&G. The situation is remarkably analogous.
P&G's board made a decision to replace CEO Bob MacDonald. Not having an immediately obvious candidate to promote internally or from the outside, the board brought back A.G. Lafley, the former CEO, as an interim CEO. As the interim CEO, Lafley immediately began a process to identify the next CEO and gave a story the following week to the Wall Street Journal so that there was no confusion about Lafley's interim status.
I am also very concerned about the budgeting process. We received three different financial projections - a new one at each of the last three board meetings - each one projecting worse results than the previous one. Most disconcerting was Mike's disavowal of the first two projections when he explained at the last meeting that those were not "his numbers." I find this particularly troubling because these projections were presented by Mike himself to the board in May and in June so it is hard for me to understand why he should not have ownership for May and June's projections. Now Centerview is running a new set of numbers.
In light of the uncertainty about our projections, I am also extremely troubled about the aggressive inventory purchases and future commitments we are making for later this year and 2014.
Yesterday, I received a call from one of the Company's largest vendors who explained his concern about the number of purchase orders he has received from the Company. When a vendor expresses concern that J.C. Penney is buying too much, we need to take a very hard look at the commitments we are making. In my opinion, Mike is overly optimistic about the near-term future of J.C. Penney. This vendor recommended, and I agree, that JCP should be making only conservative inventory commitments and then chasing inventory in the event we sell beyond our projections.
Yesterday's press release implies that my letter was the first time the board was made aware of my concerns about the hiring process. As you know, for nearly four months I have been advocating for the promised search process to be launched. Last Friday, I wrote a several-thousand-word email to the board outlining my concerns about our current trajectory and the need for a rapid search process. I asked the board to consider my thoughts over the weekend. When Tom wrote back on Monday dismissing my approach, I assumed that the full board had met to consider my concerns and that Tom, as the spokesperson, was accurately representing the views of the outcome of that meeting.
I later learned that no such meeting had taken place and that Tom had simply called directors individually. A director I spoke to earlier this week explained that they agreed with my approach for an accelerated search process, but Tom did not a call a meeting so they could share their views with other board members. Boards must have the ability to deliberate openly amongst one another so that all points of view can be adequately discussed. By not calling a meeting, Tom prevented the board from properly functioning and fulfilling its fiduciary duties.
Beginning on Monday, I and my counsel attempted to negotiate a resolution of our differences. We proposed that the Company publicly disclose that a search process had been launched and that the Company commit to an accelerated time frame. My counsel and I negotiated with Chip Delaney of Skadden and Rob Pruzan. I assumed that the board was being informed about our request and the advisors were representing the full board's views on this issue. My argument for public disclosure of the search process was based on the fact that a search process would likely leak as the search firm contacted potential candidates.
We believed that the leak would be more damaging and disruptive to the Company than if we affirmatively told the world what was going on. I also believed that publicly announcing the process would keep the board focused on getting the search done promptly.
After our proposal had been rejected by the advisors, I decided to write yesterday's letter and release it to the media because I thought it was the right thing to do as a fiduciary for the Company and its shareholders. Sometimes being "disruptive" is exactly what a Company and board needs at a critical time.
At our last board meeting at the first evening's executive session, Tom terminated our discussion despite directors asking for the opportunity to continue to discuss our concerns. As a result, the executive session we held at the end of the following day did not give the board an adequate opportunity to discuss our affairs as many directors had to leave to make flights home. To state the obvious, executive sessions require sufficient time so all issues can be fully discussed and debated, and important decisions can be made.
I am concerned that personal relationships and potentially other business dealings outside of JC Penney are affecting certain board members' judgment. While I do not know whether Tom is still splitting his GV aircraft with Mike - perhaps not, because Mike has access to our two G450s (one has to ask the appropriateness of our aircraft fleet in light of the current state of the Company) - these type of outside business dealings can color the thinking of our board when independent judgment is most needed.
As a result, I would like the full board to be provided with full and fair disclosure on any directors' business activities or financial dealings, charitable donations or activities, outside board involvement with Mike or JC Penney of any kind so that the full board is informed of the potential for any director conflicts.
I have lost confidence in our Chairman's ability to oversee this board. I would therefore recommend that Tom be replaced as our Chairman. Allen Questrom said on TV yesterday that he is willing to be our Chairman in the event we meet certain conditions; namely, he is not willing to step into a hostile situation and he must be comfortable with the CEO we designate.
If we join arms and this conflict behind us, reach out to Allen as a full board, and commit to move forward with an accelerated search process, I believe that Allen would come on board to help us right away. With Allen as our new Chairman, we would have the benefit of one of the great retail CEOs in assisting us in overseeing the Company at this critical time, and we would have his input and direction in selecting our next CEO, something with which he has enormous experience and relationships.
I hereby request that we hold a board meeting as soon as possible so that the board can deliberate and make decisions about all of the above.
Time is of the essence. Hopefully, this is the last board letter I need to release to the press.
Sincerely,
Bill