NEW YORK–(BUSINESS WIRE)–Third Point released this letter to its fellow Sothebys (NYSE:BID) shareholders, calling on them to vote for the Shareholder Slate Director Nominees Daniel S. Loeb, Harry J. Wilson, and Olivier Reza at this year’s Annual Meeting:
Dear Fellow Shareholders:
Sothebys (NYSE:BID) (the “Company”) is a leading brand in the art and collectibles market. Despite strong global tailwinds from rising art prices and increasing consumption of luxury goods, Sotheby’s has lost market share in highly profitable areas like Contemporary Art while its margins have badly deteriorated. We believe the Company’s slide is a consequence of failed leadership by a Board of Directors who collectively own a scant 0.87% stake in the Company. Their lack of “skin in the game” has led to a dysfunctional corporate culture overly focused on short-term metrics such as auction volumes at the expense of long-term investment in key areas including: talent development and securing key relationships in the art world; maintaining and modernizing the entry and exhibition spaces at its headquarters; and technological infrastructure, both in terms of digital presence and database management. Most recently, Sotheby’s Board has spent shareholders’ money on legal shenanigans designed to disenfranchise them rather than on developing and articulating a clear long-term growth strategy. Third Point’s intention is to reinvigorate the Board with our Shareholder Slate – Daniel S. Loeb, Harry J. Wilson, and Olivier Reza – and to restore Sotheby’s to meet its substantial potential.
Sothebys (NYSE:BID) current challenges are well-known consequences of poor corporate governance and malfunctioning board processes. Our view is that Sotheby’s sorely lacks innovation and creativity at its most senior levels and requires an infusion of leadership, accountability and transparency. The Company must fill the void at the top that has created a listless corporate culture characterized by disregard for shareholder interests, irresponsible cost expenditures, and many missed opportunities for growth.
Our diagnoses are not merely speculative. For example, Sothebys (NYSE:BID) has repeatedly referred to 2013 as a “record year”. In fact, this statement is misleading and demonstrates the risk of having a Board asleep at the switch and disengaged from measures of profitability that drive shareholder value. While relative to Sotheby’s prior peak in 2007, the Company sold a greater dollar value of art, the much more meaningful metric is that it generated less revenue and spent more money to do so. The bottom line is that earnings per share were down 40% versus the prior peak. What does it say about a Board of Directors that trumpets a “record year” when profits are not even close? Why is the Board not asking itself the question many shareholders have – what is wrong with this picture?
Poor Corporate Governance: The Current Board Exhibits All the Symptoms of Entrenchment; the Shareholder Slate Will Bring Fresh Perspectives
Why does Sothebys (NYSE:BID) need fresh, outsider perspectives on its Board to ask the tough questions? The entrenched Board’s current members average nearly 9 years of service, and even if their new nominees were elected the average tenure still would be 7 years. While time served is an important consideration, in our two decades as investors the most telling predictor we have found of a misaligned Board is a lack of stock ownership by the Directors. Viewed through this prism, the Sotheby’s Board fares abysmally. Together, the current Board owns only 0.87% of the outstanding common stock of Sotheby’s. Even that figure obscures the whole story –a significant portion of this tiny fraction was granted as part of the Board compensation package. During the same period that Third Point was accumulating our stake over the past twelve months, the two people on the Board who owned the most stock – including the Chief Executive Officer – actually sold shares. This should send a strong signal to shareholders that the Company’s key leadership does not share our optimism about Sotheby’s future.
A quick review of the entrenched Directors reveals each has the means to purchase stock. One can draw one’s own conclusion as to why only two of them own more than 60,000 shares. The result of this bizarre paradigm seems simple to us: the entrenched Directors have fundamentally different incentives from shareholders and their failure to focus on maximizing value explains why the Company has fallen behind.
Sothebys: The Poison Pill
Perhaps this paltry ownership stake explains the entrenched Board’s responses to Third Point’s attempts to improve the Company. In our October letter to the CEO, William Ruprecht, we suggested that Sothebys (NYSE:BID) had not done enough to keep pace with its largest competitor in many arenas. While claiming to embrace a dialogue, the Board adopted a poison pill only two days after we delivered our letter. Pulling up the drawbridge with this legal relic showed shareholders that this Board’s paramount interest is in ensuring its members’ status rather than doing its job of maximizing stockholder value.
To be clear, Sothebys (NYSE:BID) poison pill was not adopted, as one might expect, in the face of a hostile takeover or to prevent one. Third Point does not control and it is not our business to exercise control over any companies, which the Company knew. Unusually, Sotheby’s pill permits passive investors – those more likely to be supportive of the incumbent Board – to acquire up to 20% of the outstanding shares of Sotheby’s, while prohibiting non-supportive stockholders from acquiring more than 10%. The pill’s true purpose is painfully obvious: to attempt to prevent Third Point from having a say in the Boardroom. It is hard to understand the Board’s judgment that Sotheby’s shareholders should bear the substantial expense of a legal maneuver designed solely to keep Third Point from purchasing additional shares and representing its fellow owners on the Board.
On March 25, 2014, we filed a lawsuit asking the Delaware Court of Chancery to require the Company to redeem Sotheby’s poison pill in its entirety or, in the alternative, to enjoin the poison pill or allow us to acquire up to 20% of the Company’s outstanding shares without triggering the pill. On March 31st, the Court granted our request for expedited discovery and set a preliminary injunction hearing for April 25th, in advance of the planned May 6, 2014 stockholders’ meeting.
Failures of Leadership: Mismanagement and a Lack of Cost Discipline Have Hurt the Company and Its Shareholders
Why is Sothebys (NYSE:BID) spending more money to achieve worse results? In 2009, the Company acknowledged that its expenses were too high to survive the global financial crisis and launched an aggressive $100 million cost reduction program. Yet, five years later, the culture of excess has returned. Sotheby’s is spending more than ever on agency direct costs, marketing, salaries, and G & A while returning lower earnings per share to investors.
Following our original critique about excessive expenditures, the Company announced a meager $22 million reduction resulting from its latest expense review. In an attempt to appease shareholders demanding accountability, management hastily discovered ~4% in savings out of roughly $600 million in annual spending. We believe this barely scratched the surface and focused primarily on “outside costs” – the lowest hanging fruit available. More than half of these savings came from cutting the marketing budget – a move that seems potentially unwise considering Sothebys (NYSE:BID) current challenges in capturing market share – and from negotiating more favorable terms with its professional