Proxy advisory firm ISS backs Macellum’s push for boardroom change at Kohl’s

Kohl’s headquarters
Kohl’s headquarters in Menomonee Falls.

Last updated on May 2nd, 2022 at 02:44 pm

A leading proxy advisory firm has sided with activist investor Macellum Capital Management in its campaign to improve Kohl’s Corp.‘s boardroom and performance.

Macellum announced Friday that Rockville, Maryland-based Institutional Shareholder Services Inc. recommended that Kohl’s shareholders vote to elect two of Macellum’s director nominees. ISS made its endorsement in a report, which was quoted in Macellum’s news release. A full version of the report was not immediately accessible.

According to quotes included in the news release, ISS specifically named Jeffrey Kantor and Pamela Edwards as fitting additions to the Kohl’s board. Kantor is former senior executive at Macy’s, Inc., former chairman of Macy’s.com, and current president of retail and wholesale consulting firm JAK Consulting. Pamela Edwards is chief financial officer and executive vice president at Citi Trends, Inc. and board director at luxury department store chain Neiman Marcus Group LLC.

Macellum, which owns about 5% of Kohl’s stock, has been pressuring Kohl’s to improve performance or consider a full sale of the company and is running a slate of 10 director candidates against 13 incumbent board directors. The months-long campaign to take control of the Menomonee Falls-based retailer is predicated on years of stagnant sales, lagging stock performance in comparison to industry peers, shrinking market share, and increasing costs, Macellum says.

Kohl’s continues to rebuke Macellum’s claims, touting the strength of its current board leadership and doubling down on its own long-term turnaround strategy. The proxy fight is expected to culminate at the company’s annual meeting on May 11, where shareholders will have a chance to vote for either party’s nominees.

Kohl’s responded to ISS’ report Friday afternoon in a news release: “We strongly disagree with ISS’ recommendation that Kohl’s shareholders support two nominees from Macellum’s slate. Pamela Edwards and Jeffrey Kantor lack the experience necessary to oversee either the continued execution of Kohl’s strategy or a robust process to evaluate expressions of interest to acquire the company. Neither dissident nominee possesses M&A or public board experience. Kohl’s believes that adding such directors at this time would be disruptive and would negatively impact shareholder value.”

Kohl’s highlighted a couple quotes from the ISS report that almost contradicted Macellum’s narrative.

“Kohl’s is pleased that ISS agreed that a change in board control is unwarranted. ISS noted: ‘Within the context of a rapidly changing retail environment, which forced bankruptcies and liquidations of many of KSS’ competitors before and during the pandemic, KSS has been able to maintain steady margins and a strong balance sheet and has generated healthy cash flow, allowing it to pay dividends and execute share repurchases. These operating results do not paint a picture of a broken company that requires sweeping changes at the top to execute a turnaround,'” Kohl’s said.

According to Macellum, ISS points out one of Kohl’s operational challenges in its “inability to accelerate top line growth, which suggests that board members with retail and merchandising experience could add value in overseeing the execution of the current strategy.”

Kohl’s board includes five current or former retail CEOs: Michael Bender, former CEO of Eyemart Express; Peter Boneparth, former CEO of Jones Apparel Group; Christine Day, former CEO of Lululemon Athletica; Thomas Kingsbury, former president and CEO of Burlington Store; and Michelle Gass, Kohl’s CEO.

ISS suggested “shareholders may consider” Macellum managing partner Jonathan Duskin as another potential addition to the board, “as net positive, given his direct ownership stake and substantial experience in the retail sector.” Duskin is also board director at retailer Citi Trends Inc.

In Kohl’s interpretation, ISS “declined to recommend” Duskin and “recognized Macellum’s true short-term motivations,” citing this quote: “…we note that Macellum appears to have launched this control fight at a company, where a full overhaul is unnecessary, primarily with a view to completing a real estate transaction.”

According to Macellum, ISS noted that the activist investor has already had a “positive impact” on board representation, referencing to a similar campaign Macellum led against Kohl’s in 2021. That effort resulted in a settlement consisting of three new board directors: Margaret Jenkins, former chief marketing officer at Denny’s Inc. and Kingsbury were appointed by Macellum, and Christine Day was appointed by Kohl’s.

In the midst of its proxy fight, Kohl’s has been vetting potential suitors for a possible sale, having retained Goldman Sachs to engage with bidders. Gass recently said the company has engaged with more than 25 parties since January. However, Macellem has questioned whether the board is committed to conducting a sales process that’s as thorough as the company claims it is.

According to Macellum, ISS alluded to skepticism around the sales process, from both shareholders and the market.

“Although the board maintains that it is running a robust sale process, the market appears to be skeptical about its sincerity, as evidenced by the share price range below reported bids in the mid to high $60s,” ISS wrote, in reference to two purchase offers Kohl’s turned down earlier this year.

Kohl’s share were down 1.25% Friday afternoon, trading at $58.45.

“In this contest, shareholders need to consider their degree of trust in the current board to oversee the ongoing sale process, as well as the skills and expertise required in a standalone scenario in case the sale does not materialize,” said ISS.

Macellum’s news release included a statement from Duskin, who urged shareholders to consider voting not only for the two nominees ISS endorsed but the firm’s entire 10-director slate.

“ISS’s recommendation validates our thesis that the current board is running an ineffective and questionable sale process after spending years promoting standalone plans that have failed to create meaningful value for shareholders. ISS’s analysis should affirm for shareholders that it is absolutely critical to add our director candidates to the board at this inflection point to ensure a sale process is properly completed and, absent a sale, that Kohl’s finally has the proper operating plan in place,” said Duskin.

ISS’ endorsement of Macellum comes about a week after Kohl’s received backing from investment management firm T. Rowe Price, which is one of the retailer’s largest shareholders, owning 6.8 million shares or 5.29% of the company at the end of last year, according to Reuters.

“We find strong evidence that the incumbent board is committed to choosing the path it believes has the highest likelihood of shareholder value creation. Furthermore, we are confident the board is employing an independent and rigorous process to determine the appropriate path for the company,” T. Rowe Price said in a case study.

T. Rowe’s decision to support Kohl’s was seen as a setback for Macellum, which would need the full support of Kohl’s institutional investors in order to win the boardroom election, said David Swartz, an analyst at Morningstar Research Services.

“If all the institutional owners vote for Macellum’s group, then they only need a minority of the small shareholders to vote with them to win,” Swartz said in an email recently.

Other institutional-investor owners of Kohl’s include The Vanguard Group with a 10.8% ownership stake, BlackRock Inc. with 10.4% and JPMorgan Chase & Co. with 5.8%, according to Kohl’s 2022 proxy statement. All three firms have declined to comment on how they intended to vote in the company’s upcoming election.

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Maredithe Meyer covers restaurants, retail, tourism, and sports and entertainment. She joined BizTimes in 2015, previously as an intern reporter. She earned a degree in journalism from Marquette University in 2017. When she's not on the job, Maredithe coaches field hockey and loves exploring her favorite city on earth, Milwaukee.

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