Perhaps the decisive factor in how activists are perceived these days is the speed with which they move, pushing for board seats or major changes immediately after they disclose their investment and often selling their stake within a couple of years. Few if any criticisms of activists neglect to describe them as adding to the sum of short-termism in financial markets.
One activist’s campaign is playing out a little differently. When Nelson Peltz was invited to invest in General Electric by CEO Jeff Immelt as an endorsement of the company’s strategic transformation, he warned Immelt, “that comes with bite.” Nearly two years on, Peltz is baring his teeth.
Peltz’s Trian Partners began investing in General Electric in May 2015, and went public in September that year with a presentation suggesting the stock could rise to $40-45 by the end of 2017 with profits of $2.20 per share in 2018. Recently it was reported that it might push for change to help the company achieve those targets. Progress has been slow. GE shares have hit $30 per share four times since the presentation and dipped below again; last year’s earnings were $1 per share.
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Trian’s approach has not been to throw Immelt out of the window – or at least, not yet. Instead, the company this week announced a new, one-off change to management’s bonus structure, which it said was “based on discussions with Trian.” If GE succeeds in reducing costs by $1 billion in 2017 and meets an industrial operating profit target of $17.2 billion, Immelt’s bonus will get a 20% uplift (probably a little under $1 million based on last year’s $4.3 million bonus). If he fails, there is a 20% deduction, making for a tidy incentive. Mixed results will mean no changes.
It’s unusual to make such direct changes to a remuneration plan within an existing policy, and in the same week that Valeant Pharmaceuticals International published its proxy statement showing that it had dramatically toned down its incentive culture in the light of failures in its activist-influenced business model, the market should be aware that tunnel vision has its risks. But as a way to escalate an activist campaign without a full-blown distracting proxy fight, it makes a lot of sense.
Article by Activist Insights