When Activists Enter the Kitchen, the CFOs Feel the Heat

By Richard Teitelbaum Features Dow Jones Newswires

Investors cheered last month when Whole Foods Market Inc. named a chairwoman and five independent directors. After losing more than 40% since late 2013, shares rose 2.2%.

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Charles Kantor was less impressed with a different change. The portfolio manager at Neuberger Berman Group LLC, was concerned that the finance chief the company named the same day, Keith Manbeck, lacked experience, as the company is being targeted by activist investor Jana Partners LLC. Neuberger Berman owned a 2.7% stake in the upscale grocery chain as of March 31, according to FactSet.

"He has a very steep learning curve," said Mr. Kantor, who signed a letter last year calling for a new CFO with a background in real estate, cost-cutting and store economics.

When activist investors call for changes at a company or on its board, their campaigns often start at the top, with the CEO in the crosshairs. Public activist pressure played a prominent role in ousting the chief executives of three S&P 500 companies this year: insurer American International Group Inc., railroad CSX Corp. and aerospace-parts maker Arconic Inc.

But pressure is mounting on CFOs, too, as they are more often tasked with cutting waste, increasing efficiency and boosting margins.

Mr. Kantor's concerns about Whole Foods speak to the vital function that CFOs have assumed. Mr. Manbeck previously served as senior vice president of digital finance, strategy management and business transformation at retailer Kohl's Corp., according to Whole Foods.

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"It's hard to argue that they hired someone with the skill sets described in our letter," Mr. Kantor said.

A Whole Foods spokeswoman didn't respond to emails and phone calls seeking comment.

The number of companies targeted publicly by either dedicated activists or those for whom it is a strategic focus rose 24.6% to 456 world-wide in 2016 from 366 from the previous year, according to Activist Insight.

The kinds of opportunities activists exploit are changing, and some practitioners are recalibrating their tactics in ways that bolster the CFO's profile.

After the 2008-09 financial crisis, U.S. companies built up cash on fears of more turmoil. That made them targets for activists who could score a bump in share price by pushing management to use cash for a dividend increase or share buyback.

"Those opportunities have largely vanished," said David Hunker, head of shareholder activism defense at J.P. Morgan Chase & Co."That's led activists to find other levers to improve performance."

Operational changes are more arduous than buybacks for finance executives. In 2014, Starboard Value LP lobbied Darden Restaurants Inc. to cut back on free breadsticks and sell more wine at its Olive Garden chain, among other changes. The company had three CFOs in eight months. Starboard sold its stake last year after sharp price gains in Darden stock.

"It's become more granular," said Eleazer Klein, a partner at the law firm of Schulte Roth & Zabel LLP. "They really get into the weeds on these things."

Starboard Value didn't respond to requests for comment.

The finance chief's role can require doing the activist's bidding -- or pushing back.

"That takes a special person in the CFO position to stand up to an activist and say, 'That's not right,'" said Valeant Pharmaceuticals International Inc. finance chief Paul Herendeen.

His experience dealing with pressure from activists dates back to the mid-2000s while CFO at Warner Chilcott PLC, he said. Mr. Herendeen was two months into a new CFO role at Zoetis Inc. in 2014 when he learned Pershing Square Capital Management LP had a stake of more than 8% in the animal-health company and was agitating for board seats and expense reductions.

Mr. Herendeen helped lead a drive that included cutting Zoetis's head count by more than 20% over about 24 months, refocusing research and development, and reducing the variety of packages and dosages it sold. The efforts are expected to save $300 million in annual costs in 2017, according to a company spokesman.

He joined Valeant last year, another Pershing Square holding at the time, and has quarterbacked a debt restructuring, cut spending and helped build a 200-person sales force focused on Xifaxan, a gastrointestinal drug. Valeant reached a deal on Thursday to sell its iNova Phamaceuticals unit for $930 million to a company jointly owned by affiliates of Pacific Equity Partners and Carlyle Group.

"They play an important role in keeping management honest," Mr. Herendeen said of activists.

Demand for activist-seasoned CFOs is rising. "A lot of our more recent requests are that a candidate has had experience with an activist," said Peter Crist, chairman of Crist|Kolder Associates, an executive recruiter. "We've had more CFOs say, 'You know, so-and-so at ValueAct really likes me,'" he added, referring to ValueAct Capital Management LP.

CSX named Hunter Harrison as CEO in March, less than two months after Mantle Ridge LP led a campaign to remove Michael Ward. Arconic's Chief Executive Klaus Kleinfeld left after sending an unauthorized letter to activist Elliott Management Corp. AIG hired Brian Duperreault in May after Peter Hancock said he would resign.

The finance chiefs at those companies remain. However CFO turnover is always a risk when there is a new boss. According to executive-recruitment firm Korn/Ferry International, 22% of new CFOs are appointed within a CEO's first year on the job, and 41% of new CFOs are appointed within a CEO's first three years on the job.

And any CFO engaged with an activist faces an additional job hazard. "It's much easier to fire the CFO," said John Coffee, a professor at Columbia Law School.

"One of the ways you show you're having an impact is to take one of several executives to the guillotine."

Write to Richard Teitelbaum at Richard.Teitelbaum@wsj.com

(END) Dow Jones Newswires

June 12, 2017 05:44 ET (09:44 GMT)