At Arconic, Race Heats Up for Next Chief Executive

By Bob Tita and David Benoit Features Dow Jones Newswires

The abrupt departure of Klaus Kleinfeld as Arconic Inc.'s chief executive officer this week opens a new chapter in the battle over leadership at the aerospace and auto parts supplier -- and gives next month's board election added urgency.

Continue Reading Below

David Hess, who was appointed as interim CEO on Monday, is a candidate for director but hasn't indicated whether he wants the top job.

But Elliott Management Corp., the activist hedge fund behind the monthslong campaign to oust Mr. Kleinfeld, is already pushing its own choice: Larry Lawson, a onetime chief executive at aerospace supplier Spirit AeroSystems Holdings Inc. who also held senior roles at Lockheed Martin Corp. In addition, Elliott is seeking four board seats, on top of the three directors it suggested last year.

The stakes are high as Arconic is a key part of the global aerospace supply chain, with Airbus SE and Boeing Co. forecasting demand over the next 20 years for more than 33,000 new jetliners valued at more than $5 trillion. Most will include parts made from Arconic's aluminum and specialized metals, but jet makers are pushing suppliers to cut prices.

With the CEO role unsettled, Arconic shareholders on May 16 will likely be selecting the board members in charge of picking the company's next leader. There are five seats out of 13 currently up for election. Both slates of potential directors will likely argue they have the trust and experience to make that selection, and the result of the board election could shed light on who will win the CEO post.

"The momentum [in the proxy contest] is still with Elliott," said Josh Sullivan, an analyst for Seaport Global Securities. "But the board is in a better position now without Klaus. David Hess has the skill set and he's relatively new to the board, so it's not like the company's strategies are all his."

Continue Reading Below

Mr. Hess, who was recruited by Mr. Kleinfeld, initially arrived at Arconic last month as the proxy fight with Elliott was intensifying. He has more than three decades of experience managing aerospace businesses, including United Technologies Corp's. Pratt & Whitney jet engine unit, a major Arconic customer.

Mr. Kleinfeld said during a recent interview before his ouster that he had wanted Mr. Hess to join the board for years because of his deep knowledge of the aerospace and metals industries, with a record of shepherding long, difficult projects, including the development of a new generation of Pratt jet engines.

In the short time left before the election, Mr. Hess, 61 years old, will likely stay the course set out by the departed chief, industry analysts say, by focusing on relationships with large customers and developing new products for Arconic, which became a stand-alone company after splitting from Alcoa Corp. late last year. But Seaport's Mr. Sullivan predicted the board and Mr. Hess will also try to distinguish themselves to shareholders. "He's going to have to make some noise about his capabilities," he said.

Mr. Hess wasn't available for an interview. Arconic said Elliott will effectively control the CEO selection if its four candidates are elected in addition to the three Elliott-recommended directors already on the board. "We do not believe it is in shareholders' interests for a single investor to nominate seven directors on a 13-person board," Arconic said in a written statement Wednesday, after the story was published.

Mr. Lawson, age 58, has 37 years' experience in the aviation industry, and is currently a consultant for Elliott. The hedge fund's prescriptions for advancing shareholder interests are focused on boosting margins, both through cost cuts and supplying more complex and profitable parts.

Mr. Lawson is credited with turning around Spirit, which builds fuselages and other parts for Boeing and Airbus. He reined in spending and raised prices. From April 2013 to last July, when he was CEO, the company logged a 132% return, while the S&P 500 returned about 50%.

But Mr. Lawson's practice of repeatedly raising prices at Spirit attracted complaints from major customers. He renegotiated several contracts that had left Spirit nursing big losses on some programs to make parts for business jets. Industry analysts say his style alienated some colleagues and customers, even though the strategies helped expand margins in the short run. Arconic has said deploying similar tactics with Arconic customers would undermine its long-term supply agreements.

Spirit declined to comment about Mr. Lawson's time with the company or his pricing strategies, releasing a statement that said it "has no interest in or involvement with Elliott Management and its dealings with Arconic."

Elliott didn't have any comment and also declined to make Mr. Lawson available.

Both Messrs. Hess and Lawson have had missteps in the past, notably in relation to building the F-35 Joint Strike Fighter. Under Mr. Hess's watch, Pratt came under intense criticism from Defense Department leaders for cost overruns and design problems for the engine, though these have largely been resolved. Before leading Spirit, Mr. Lawson managed the F-35 fighter jet program for Lockheed Martin at a time when cost overruns forced the program to be reset.

Although the selection of a CEO would ultimately be up to the company's board, Elliott has stressed that Arconic's chief executive should share what it says is Mr. Lawson's devotion to creating shareholder value. Elliott and its backers have criticized Arconic's structure under Mr. Kleinfeld for centralizing management functions and discouraging profit-generating initiatives that don't originate in the executive suite. Elliott has detailed a first-100 day plan that would include reorganizing the structure to identify who in the organization is responsible for each line of profit.

Arconic reports first-quarter results on April 25.

--Doug Cameron contributed to this article.

Write to Bob Tita at robert.tita@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

April 19, 2017 19:08 ET (23:08 GMT)