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Sears, Roebuck & Company is one of the great success
stories in American commerce. The company had its roots in
1886 when Richard Sears started selling watches in rural areas.
Later, he developed the idea of selling goods by mail-order,
taking a host of new products to populations cut off from
big city stores. The famous Sears catalog became a byword
for Sears’s reliability and quality. In the 1920s, the company
began opening stores to back up the catalog business. The
stores proved every bit as successful.
By the 1950s, you could buy a prefabricated house from Sears,
not to mention clothes for your family and a kitchen table
for them to eat at. Single handedly, the company set out to
raise the standard of living of the great American middle
class.
By the 1970s, Sears accounted for a whole one percent of
the gross national product. Two in three Americans shopped
at Sears within any three months of 1972. Almost 900 stores
covered the American continent.[i]
Diversification strategy: the fate of retail
In the early 1980s, Sears built on the success of its insurance
subsidiary, Allstate, by adding real estate and brokerage
services as well – Coldwell Banker and Dean Witter, both purchased
in 1981. This diversification was the brainchild of CEO Ed
Telling and was initially successful. From 1984 to 1990 the
earnings of the financial side improved 55 percent. But nobody
was minding the store. The vast chain of over 850 outlets,
the flagship division of the Sears, Roebuck empire, were failing
fast. In the seven years up to 1990 the retail group’s earnings
declined at an annual rate of 7.7 percent. By the late 1980s,
Sears was set to lose its century-old position as the largest
American retailer. The decline was reflected in the stock
which, between January 1984 and November 1990, offered investors
a total average return of as little as 0.1 percent.[ii]
This lethargy was in part a function of the corporate culture
at Sears. Its style was inward-looking and change-resistant;
in many ways, that had been Sears’s strength. Consumers liked
the consistency and reliability of its products and employees
liked the commitment to promotion from the inside. Sears’
rock-steady reputation allowed the company the ability to
weather most economic downturns. Sears had always been a shopping-chain
that people trust; a place selling quality goods at reasonable
prices, all under one roof. It became more than just a store.
It was a venerable American institution, and Sears rightly
traded on that reputation.
But Sears’s venerability has became a liability when it failed
to respond to changing times. Retail changed dramatically,
and the ancient lumbering Sears was last in the race for the
new markets. Trendy national chains like The Gap or The Limited
captured a vast market of people who want reasonably priced
clothes that look stylish. Wal-Mart and K-Mart attracted people
who liked their clothes cheap. Specialty stores undercut Sears
on almost every other front. People who wanted a hi-fi ten
years earlier might have gone to Sears knowing that they’d
find one of good quality at a reasonable price; now they would
probably go to Circuit City knowing they could find the same
model cheaper.
Sears has a dated image. Joe Cappo described a New York store
in Crain’s Chicago Business: “It was like being time-warped
30–40 years back into history. This wasn’t a store. It was
the Metropolitan Museum of Outdated Kitsch. Remember the ugly
lamp your grandmother had in her parlor? Sears still has that
lamp.”[iii] Another shopper said: “I still think of it as
a place where you go to buy a ladies Size 18,” and USA Today
asked: “Will anyone believe Sears stands for fashion as well
as bowling balls?”[iv] Lean and efficient discounters like
Wal-Mart and K-Mart were catching up and were soon to overtake
Sears’s sales volume. Sears was stuck with locations and properties
that were selected years before; newer competition could create
stores for today’s market. Sears had always boasted that it
was the place where America shopped, the definition of solid
middle-class values, the purveyor of the American dream. According
to Crain’s Chicago Business: “If Sears is ever to turn the
tide of the last decade, it will need new thinking and new
people. This doesn’t mean Sears is a bad company. In fact,
it is a very good, solid 1950s company. And it will need something
better than 1950s thinking to move it into the 1990s.”[v]
But with the money from the financial divisions coming in,
it was easy to ignore the tumbling profits and shrinking markets.
Edward Brennan, the corporation’s chairman, CEO, and chief
executive of the retail division was an undeniably capable
man. He had led the retail division in the early 1980s and
made a brilliant job of it. He was the man behind the “Store
of the Future” that made a successful early attack against
Sears’s competitors. He became CEO in 1984. But it was under
his tenure that, somehow, the Store of the Future has become
the Store of the Past in the minds of so many Americans. Brennan
is a “Searsman” to his marrow. He has worked in retail all
his life, and at Sears since he was 26. His father, mother,
brother, uncle all worked at Sears. Brennan was dressed only
in Sears clothes for the first ten years of his life. He had
never owned a pair of jeans because his father was a dress-slacks
buyer. According to Donald R. Katz in The Big Store, “No one
in Ed Brennan’s family ever managed to leave Sears . . . the
Brennans ranked among those special families so bred to the
romance of the place that it was hard to tell company and
family apart. Even by Sears, Roebuck’s unusually emotional
standards, Eddie Brennan took it all quite personally.”[vi]
Carol Farmer, a retail consultant from Chicago said: “The
trouble with Ed Brennan is that he’s in love with Sears the
institution. And it’s the institution that needs to be debunked.”[vii]
The problem was obvious; the cure, less so. In November 1988,
CEO Ed Brennan launched a new strategic plan to revive the
ailing merchandise division. The plan was the product of “an
intensive strategic examination of our corporation” that would
usher in “a period of unprecedented growth.” Sears committed
itself to “everyday low prices” in an effort to compete with
thriving discount stores, and launched “power formats” to
sell brand-names alongside Sears’s traditional house labels.
The board also voted to spend $1.6 billion buying back Sears
stock and resolved to sell the Sears Tower, the tallest building
in the world, much touted as a symbol of pre-eminence, but
considered by critics to be just the company’s largest white
elephant.
Wall Street was disappointed by this strategy. Many observers
had hoped for much more. Sears’s stock had risen on the back
of a hope that a major restructuring was in the pipeline.
Analysts predicted that Sears, Roebuck stock could possibly
double in value if the successful financial divisions were
spun off and management’s resources and energy were devoted
to making the retail operation efficient. Analysts thought
it was misguided to use the money raised from selling valuable
assets to buy back shares rather than build up business. “From
the point of view of gaining long-term strategic advantage,”
said Louis W. Stern of Kellogg Business School, “it’s madness.”[viii]
One analyst predicted that the changes would not satisfy the
increasingly hostile shareholders: “Institutional investors
will be disappointed by today’s announcement,” said Robert
Raiff, the Sears analyst at C.J. Lawrence & Co. “They
were expecting more and I hope they get more.”[ix] Others
were dismayed by the failure of merger talks with Montgomery
Ward, run by Brennan’s brother.
Despite the criticism, the corporation went ahead with its
restructuring. But, in two years, this strategy failed to
stimulate business. The competitive pricing policy failed
to halt the sweeping invasion of Sears’s retail markets by
discounters and the “power formats” campaign had resulted
in only Brand Central being rolled out to all stores. Meanwhile,
the cash generated by the financial divisions of the company
– Dean Witter, Allstate and Coldwell Banker – were used to
buttress the corporation’s flagging fortunes. The retail division
continued to wilt; Wal-Mart and K-Mart continued to catch
up.
From 1984 to 1990 Sears had a total annual return, including
dividends, of a mere 0.7 percent. For ten years in a row,
the company promised a 15 percent return on equity, and for
ten years in a row they failed to deliver. And things were
looking worse; 1990 was a disastrous year for the company
with earnings and stock prices at 1983 levels, a return on
equity of 6.8 percent, and a loss in the first nine months
of $119 million.
Where was the board?
What about the board of directors? A board, after all, is
responsible for overseeing the overall strategic direction
of the company. If Brennan’s program continued to fail in
its bid to raise sales; if Wall Street continued to advise
more fundamental treatment for the problem; if Sears’s stock
continued to sag at somewhere under half its intrinsic value;
if the financial services continued to have their profits
swamped by retail’s losses; if Sears’s reputation continued
to sink under the weight of accusations that it was out of
date . . . shouldn’t the board do something? In theory, of
course, the answer is yes. At Sears, in practice, the answer
was silence. Like management, the board of Sears had grown
up as an inward-looking, self-perpetuating dynasty.
Another extract from The Big Store details how board meetings
worked a decade earlier under Telling. The view expressed
is that of Charlie Bacon, a senior manager in the Merchant
division: “Charlie believed that the board of directors under
Telling had become one of the least animated decision-making
bodies imaginable. He knew that reports to the board were
all checked over by [chief financial officer] Dick Jones,
and scripts were so rigidly followed that no deviation from
approved texts was tolerated. . . . The outsiders on the Sears
board were by and large people who owned few shares of Sears
stock and who collected $40,000 a year for attending occasional
meetings. What they knew of the company came largely from
the company.”[x]
Shareholder unrest
In July 1990, the first rumblings of the coming shareholder
storm were heard. At a breakfast meeting with Sears, Roebuck’s
largest twelve investors, Ed Brennan and retail chief Michael
Bozic, gave an upbeat assessment of the corporation’s plans.
Investors exploded. They cited a grim share performance –
value had dropped 15 points since 1989 – and gave Brennan
one year to achieve marked improvement in retail, or to look
for another job. Russell Thompson, a money manager with Waddell
& Reed, who was present at the meeting, said: “We told
them ‘somebody could raise $25 billion and easily take you
guys out tomorrow.’”[xi] Or, in the words of one board member,
Albert Casey: “It was time to fish or cut bait.”[xii]
Brennan’s first step was to take control. Michael Bozic lost
his job as head of the retail division and was replaced by
Brennan himself. The CEO then committed himself to an acceleration
of the power-formats campaign, and to a savage, across-the-board
cost-cutting program. Brennan announced that 21,000 jobs would
be pared within the year, and numerous stores were closed
or re-modeled. In interviews with the press, Brennan got tough;
no part of the Sears empire was safe. “If it doesn’t pay its
way, it goes,” he said, raising the possibility that the century-old
catalog business could come under the knife.[xiii]
But like the 1988 announcements, Brennan found that few people
were convinced. In early December, the California Public Employees
Retirement System, holder of 2.2 million shares, voiced its
concern about Sears’s performance, citing depressed stock
and the failure of retailing strategies. The message, said
CalPERS then-chief Dale Hanson, was simple: “From 1984 on,
Sears went to hell in a handbag.”[xiv] In an open letter to
Brennan, Hanson proposed the creation of a shareholders advisory
group. Such a group would give the board non-binding advice
on matters such as major restructurings, acquisitions, mergers,
and exe-cutive compensation. Hanson hinted that he favored
a major restructuring, thus joining the growing school of
thought that argued that Sears’s value could only be realized
when the successful financial divisions were spun off from
the plunging retail division.
In February 1991, some four months after launching the idea
of a shareholder advisory group, CalPERS agreed not to press
for its creation at the May annual meeting on condition that
Sears executives meet with CalPERS at least twice a year.
But performance continued to decline, and investors continued
to seethe. Fourth-quarter earnings revealed early February
showed a 37 percent decline in earnings, before a $155 million
charge for the retail division restructure. Including the
charge, earnings declined 74 percent
Public confidence in Sears hit a new low. Business leaders
surveyed by Fortune magazine rated Sears at 487th out of 500
companies for the reputation of their management. Wall Street
analysts said that Sears required $1 billion in cuts to make
it competitive, substantially more than the $600 million that
Brennan said the cost-cutting program would achieve. Standard
and Poors reduced its credit rating on Sears to single A.
Asset Analysis Focus commented that: “Sears, Roebuck &
Co. has one of the greatest price to intrinsic value disparities
of any large publicly traded company.”[xv] In February 1991,
Sears traded at between $25 and $30 a share, while analysts
speculated it had a breakup value of up to $90 a share.[xvi]
George Regan of the Teacher Retirement Fund of Texas said:
“Obviously whatever management is doing isn’t working. Either
you can change the management or you can change the system.
And sometimes the only choice is to change the management.”[xvii]
Business Week speculated that “a power shift may be in the
works” and that P.J. Purcell, chief of Dean Witter, might
be poised to take over.[xviii] In May of 1991, Robert A.G.
Monks (co-author of this book) stepped in. He engaged in a
proxy contest for one seat on the board of a public company,
something no one had ever done before at any company. And
his target was Sears.
Monks had submitted his name to the board the previous fall,
along with the names and numbers of six CEOs on whose boards
he had served, as references. The directors did not discuss
his candidacy at the November meeting, they said, because
they didn’t have enough information, though at no time did
they contact the references provided. They did discuss his
candidacy at the February meeting. It wasn’t that they used
the extra time to gather more information; they didn’t. They
explained later that they decided that additional information
was not necessary since Monks’ record, already well known
to them, clearly qualified him for the job.
The board turned him down. However, Sears’s own by-laws provide
that a shareholder may nominate a candidate for the board.
Apparently, the corporate leaders think this is a fine system,
as long as no one tries to use it. Monks was nominated by
an old friend, also a Sears shareholder, and he sought election
as a dissident candidate.
Monks had been looking for a company that would allow him
to raise some of his general concerns about corporate governance
and corporate performance. Sears met all of his criteria.
First, the issues were suitable for shareholder involvement;
they concerned the overall structure and direction of the
company. Second, the obstacles to realizing shareholder value
were those that could be addressed by shareholder activism.
Third, success was achievable: the level of institutional
ownership, the vacancy on the board due to the retirement
of a director, and the cumulative voting in director elections
made it possible to be elected with only 16 percent of the
vote, with five seats up for election. Monks wrote about their
response to his decision:
It threw Sears into such a tizzy that they hired (renowned
takeover lawyer) Marty Lipton, brought a lawsuit to stop me
and budgeted $5.5 million dollars over and above Sears’ usual
solicitation expenses, just to defeat me (as Crain’s Chicago
Business pointed out, one out of every seven dollars made
by the retail operation last year). Sears also assigned 30
of its employees to spend their time working to defeat my
candidacy.
The real outrage was that they got rid of three of their
own directors, just to prevent me from winning one seat, what
I refer to as “Honey, I Shrunk the Board.”[xix] With cumulative
voting and five directors up for election, I could get a seat
with only 16 percent of the vote, not impossible for someone
with strong connections to large institutional holders. But
Sears shrunk its board by eliminating three director seats,
which meant that I needed 21 percent of the vote to win a
seat; virtually impossible to obtain, because 25 percent of
the vote was held by Sears employees (and voted by Sears trustees)
and the rest was held by individuals that it was impossible
for me to solicit, without spending millions of dollars. The
myth is that the officers of the company report to the board.
The reality is that the board reports to the CEO, at least
at Sears. When the CEO (who is also Chairman of the Board
and head of the Board’s nominating committee) tells three
directors they are off, they are off, especially, as in this
case, when they are inside directors, full-time employees
of the corporation.
Jay Lorsch, Harvard Business School Professor and expert
on boards of directors wrote in the New York Times: “This
bothers me. I like to see American managers take boards seriously
and use them as a check and balance against the abuse of management.
When you play with boards in this way, you undermine their
legitimacy.”[xx]
Crain’s Chicago Business cited Sears’s “abysmal performance”
and criticized Brennan for having “led the company’s flagship
retail division down one strategic dead end after another.”
The newspaper fully praised Monks’s attempt to let some fresh
air into the Sears boardroom: “Sears is scared and with good
reason. For years, its shareholders have been lapdogs. Now
they’re showing some teeth . . . Why doesn’t Mr. Brennan let
his record speak for itself? Then again, maybe that’s what
he’s afraid of.”[xxi] Pension and Investments ran an article
criticizing both Chrysler (that shrank its board to get rid
of a genuinely independent outsider) and Sears for shrinking
its board to keep out Monks: “The moves were virtually admissions
by the two companies that they prefer to maintain tame boards
that will go along with whims and wishes of strong chief executives.
Given the poor performance of both companies the desire for
tame boards is understandable. And nothing so demonstrates
the need for more independent voices on each board as their
board’s acquiescence of these moves.”[xxii] Monks wrote:
There was never any question about who had more money. Sears
spent half of what it budgeted, and still outspent me 10 to
1. Sears brought suit against me to prevent me from getting
a shareholder list, claiming I wanted it for an “improper
purpose.” The “improper purpose” they alleged was promoting
my new book. I would have to be Kitty Kelley to make enough
money on a book to pay for a proxy contest, but I would have
to be Sears in order to finance both a proxy contest and a
lawsuit to make that point. So the lawsuit effect-ively stopped
me from communicating with smaller shareholders. Even if it
had not, though, the expense would probably have been prohibitive.
Following approval and mailing of their proxy statement,
Sears was free to have press conferences and to comment to
the press on my candidacy, including mischaracterizations
of my positions, but I was not permitted to respond. The weird
world of SEC regulation prevented me from making any public
statement for two crucial weeks, because of the risk that
some shareholder might see my remarks before the SEC had approved
my solicitation materials. (Note: this rule was later changed,
partly as the result of Monks’ situation.) This problem persisted
right up to the Annual meeting, as I could not afford the
roughly $1.5 million necessary to send the approved material
to every shareholder.
It was not my intention to displace anyone. One of the reasons
I picked Sears was that there was an opening on the board,
with the retirement of former CEO Edward Telling. Therefore,
I wanted to put the Sears candidates on my proxy card, so
that a shareholder who did not want to cumulate votes could
vote for me and for two of the incumbent directors. SEC rules
do not allow that. (Note: this rule was also later changed,
as a result of Monks’ situation.) If there had not been cumulative
voting, this would have been an even more devastating blow,
as a fiduciary voting proxies would have to throw away two
votes to give me one.
It was on this basis alone that Monks lost substantial votes.
One of the other candidates, a black woman university professor,
had a good deal of support from investors who were unwilling
to throw away two of their votes to give one to Monks. Monks
also lost votes from institutional investors who had (or hoped
to have) commercial relationships with the company and felt
pressured to vote with management. And he lost the votes of
at least one long-time supporter in the institutional investor
community because a proxy contest for one board seat was not
covered by their proxy guidelines, and the bureaucracy did
not provide for a timely way to develop new ones. Monks continued:
But perhaps the biggest frustration was that I could not
reach the largest group of shareholders, Sears’ own employees.
Sears offered to mail my materials to them, if I would pay
$300,000 in costs (more than my entire budget for the solicitation).
But more serious was that the trustees (four out of five of
whom were past and present members of the Sears board) would
have voted the stock without even considering my candidacy,
if not for the intervention of the Labor Department. That
resulted in a pro forma meeting with the trustees, who proceed
to vote for their board colleagues. Many Sears employees called
me to say that they were unable to get any information about
my candidacy, or that they wanted their stock voted for me,
but could not direct it. Sears refused my request for confidential
voting, which would at least have allowed employees who held
stock in their own names to vote for me without fear of reprisal.
In theory, of course, the directors are there to represent
the shareholders, evaluate the performance of the Chief Executive
Officer (CEO), and oversee the overall direction of the company.
If they have one obligation, it seems to me, it is to ask
hard questions. But the current rules not only fail to ensure
that directors ask questions, they prevent others from asking
them as well.
Let’s look at Sears. Edward Brennan holds four different
jobs. He is CEO of the company as a whole, Chairman of the
Board, and head of the com-pany’s flagship division, the retail
operation. Part of the job description for those jobs is that
the people in them are supposed to communicate with each other,
measure each other, ask questions of each other. One person
simply can’t do them all. On top of that, Brennan is head
of the board’s nominating committee. He gets to pick his own
bosses, and, as my experience shows, when he is faced with
someone he didn’t pick, he brought all of the corporate resources
to bear to stop me.
Where was the board in all of this? The answer lies in another
question – Who are the directors? “Independent director” is
something of an oxymoron in today’s companies. The directors
are selected by the CEO. The candidates run unopposed, and
management counts the votes. In the rare case of an opposing
slate, management gets to use the shareholders’ money to pay
for their side of the contest, without regard for the interests
of shareholders, while the dissidents must use their own.
The CEO determines the directors’ pay, and the directors set
the CEO’s pay. It’s a very cozy relationship, and one that
has been most profitable for both parties, as CEO pay and
director pay have skyrocketed over the past decade, at many
times the rate of increase in pay for employees. This system
does not promote accountability, or even the questions that
are a necessary predicate for a climate of accountability.
At the annual meeting, after the votes were cast, I said
that Sears had changed, as a result of my contest. Brennan
said, “Baloney.” Time will tell. But I can think of three
important changes already. First, my arguments about the ability
of Sears’ investment banker to give an objective opinion about
the value of remaining a conglomerate led to the disclosure
that Goldman Sachs had indeed advised them that they could
realize more value – as much as three times more – by spinning
off the other entities. This may not have changed Sears –
yet – but it certainly changed the perception of Sears in
the investor community. Second, possibly as a result, there
has been some evidence that Sears is “in play.” If Sears wants
to continues as a conglomerate, it will have to find a way
to produce that value for shareholders. Finally, ironically,
Sears is now left with a board with a higher percentage of
outside directors, directors who can expect extra focus on
their election next year. Brennan may just find that at least
some of the extra accountability I was seeking may be the
result of the actions he took to stop me.[xxiii]
Monks was right, but it took another year. While he was not
elected to the board, Monks received more votes than any other
director from the shareholders who received his proxy card.
Sears responded to this strong indicator of shareholder concern
by making some changes, including reducing Brennan’s jobs
to three (and later to two when a new CEO was found for the
retail division). Brennan was removed from the board’s nominating
committee, and independent trustees (not directors) were appointed
for the employee stock plan.
In 1992, Sears “shrunk the board” again, again making it
virtually impossible for him to get enough votes to be elected.
Instead, Monks devoted his resources to supporting five shareholder
proposals submitted by others. This included an SEC-cleared
mailing (note: this would not be required under the revised
rules) and a full-page ad in the Wall Street Journal calling
the Sears board “nonperforming assets” (see FIGURE 6.1 - The
Wall Street Journal advertisement)
The five resolutions came from a wide variety of sponsors,
almost a “who’s who” of shareholder activism: a public pension
fund, a Sears employee, a member of the United Shareholders
Association, an individual investor, and one of the Gilbert
brothers, who started the whole shareholder crusade more than
50 years ago. They proposed: restore annual election of all
directors (as was the practice for more than 100 years, until
staggered elections were adopted as an antitakeover move in
1988); to separate the positions of CEO and chairman of the
board, to allow confidential voting by shareholders (to prevent
pressure on shareholders who vote against management); to
study the benefits of divesting one or more of the financial
services divisions; and to impose minimum stock ownership
requirements for directors.
The annual meeting, held in Atlanta on May 14, was a catalog
of protest. The Chicago Tribune wrote: “For more than two
hours . . . Brennan was forced to stand by as speaker after
speaker told him his company’s performance had been poor in
the last year.”[xxiv] USA Today agreed, describing the mood
of shareholders as “rebellious.”[xxv] Hazard Bentley, the
Allstate employee who sponsored the divestment resolution,
said “there are grave problems in the company to which I have
dedicated my working life,” and Cari Christian of the United
Shareholders Association asked, “How can the board effectively
serve shareholders as the overseer of management, when it
is led and dominated by the company’s senior manager?” Other
shareholders were, even more blunt: “Your retail stores are
lousy,” said a 70-year old veteran Sears customer.
At the meeting, Monks made a statement that concluded:
We are the owners of Sears, Roebuck and Company and we are
asking for the most basic elements of accountability. We are
asking for the most basic and the most essential attribute
of ownership: true confidential voting, the right to express
opinion free of the possibility of coercion or reprisal. This
is the right guaranteed to all citizens of the United States
in the exercise of political rights; it is accorded to the
shareholders of Exxon, IBM, General Motors and other leading
corporations in the exercise of their shareholder rights.
I have looked shareholders in the eye as they told me they
could not vote with me due to fear of coercion. As the former
chairman of a major fiduciary bank, I have felt it myself.
Even the most conscientious and cour-ageous shareholder cannot
risk the commercial suicide of opposing a substan-tial potential
customer. No vote can be meaningful as long as the company
can retaliate. Why won’t Sears give its shareholders the dignity
and full protection of true confidentiality? A more difficult
question is why our management would advertise that it has
adopted a policy of confidentiality, when the fine print says
that it doesn’t apply in a proxy contest, the one situation
where it makes a difference?
What does it mean when management announces an objective
and then fails to achieve it for every one of ten years? In
the interest of honesty, should the objectives be lowered?
Should there be some consequences for this failure to meet
their own goals, some increased accountability? Two of the
shareholder proposals, the proposal to separate the Chairman
and the CEO and the proposal for annual election of all directors
will make a difference. These are changes that make questions
more likely.
Should there be a change in the corporate strategy? What
does it mean when the board opposes an independent study,
by a firm of their own choosing? To me, it demonstrates yet
again that they just don’t want to respond to any questions.
Who are the directors? Won’t it make a difference in their
attitude toward shareholders if they have some minimal shareholding
themselves, not the 100 shares a year they are given but shares
purchased with their own money? That is the purpose of the
last of the resolutions.
Sears has a slogan: “You can count on us.” We want to hear
the board say that to the shareholders. We want to see the
board earn that trust. The resolutions currently presented
by five different and diverse shareholders and groups demonstrate
a high level of concern, even dissatisfaction. We want better.
We are tired of waiting. And until we see some change, we
will keep reminding you – you can count on us.
Two of the resolutions (confidential voting and annual election
of directors) got votes of over 40 percent. The proposal to
separate the CEO and chairman positions captured 27 percent.
The proposal for a study of the benefits of divestment received
a 23 percent vote. And nearly 6 percent of the shareholders
withheld approval of the candidates for the board of directors,
then a record vote of no confidence for a public company board.
Things continued to worsen for Sears. The Sears auto repair
facilities were charged with fraud by the Attorneys General
of California and New Jersey, who complained about the “company
culture.” A law suit was filed in connection with Martinez’
appointment as CEO of the merchandise group. Dean Witter partnerships
had “roll up” problems. Allstate fared worse than its competitors
in the liabilities incurred by Hurricane Andrew.
The company announced the appointment of two new outside
directors, Michael Miles, chairman of Phillip Morris, and
William LaMothe, former CEO of Kellogg.
On September 29, 1992, Sears announced a massive divestment
plan. Sears would no longer offer its “socks and stocks” policy,
and would focus more directly on the retail division. Coldwell
Banker would be sold in its entirety. Twenty percent of Dean
Witter would be sold, and the rest spun off to shareholders.
Sears would also put 20 percent of Allstate on the block.
The reaction of the market was positive. In a single day
the stock rose 3 7/8
in a market that slid 9 points. Over $1 billion was added
to Sears’s market value in that day alone.
One year later, it was clear that the restructuring helped
Sears turn itself around. For stockholders, the shakeup proved
bountiful. A year after the restructuring, the stock traded
at around $56, down from a 52-week high of $57.75. On the
day Sears announced its restructuring, the stock opened at
$41. Thus, shareholders saw each of their shares appreciate
about $15 in a single year. This increased Sears’s market
value by over $5 billion.
Sears shareholders garnered other values as well, via the
spinoff of Dean Witter, Sears’s brokerage arm. Twenty percent
of Dean Witter was sold in March 1993, ahead of schedule.
The remaining 80 percent was spun off to shareholders. Sears
holders received a special stock dividend of four-tenths of
a share of Dean Witter for each Sears share they owned.
The Sears example demonstrates the role that focus by active
shareholders can and should play in under-performing companies.
What’s more, it shows the crucial link between activism and
value. As a result of shareholder involvement, Sears became
a better run, more open, more accountable and more valuable
company.
Sears: a postscript[xxvi]
It was Fortune magazine that first identified Sears Roebuck
as a “dinosaur” (see page 234). But, in recent years, the
famous retailer has shrugged off its carapace and evolved
into something that can survive and thrive. Looking at Sears
four years later, Fortune commented that “the ‘dinosaur’ …
turned into a cash cow.” The company took a fresh approach,
and was finally able to rid itself of its fusty, outmoded
image. In 1997, Sears was voted Fortune’s most innovative
general merchandise retailer, and the company gained market
share in almost all categories of merchandise.
What was the key to the turnaround? Fortune identified a
change in culture, a change that required Sears to free itself
of its glorious past and concentrate instead on the future:
“the main reason Martinez has been able to change Sears is
that he changed the people … ’We used to be so inbred, it’s
a wonder we didn’t have one eye in the middle of our foreheads’
says executive vice president Bill Salter, a 32 year old Sears
veteran.”
Endnote:
Patricia Sellers, 'Sears: The Turnaround is Ending: the Revolution
Has Begun"
--------------------------------------------------------------------------------
[i] Donald R. Katz, The Big Store (Viking, New York, 1987),
p. vii.
[ii] Editorial, “The Need for Activism,” Pensions and Investments,
Dec. 24, 1990, p. 12..
[iii] Joe Cappo, “Big store masters art of the big store,”
Crain’s Chicago Business, May 20, 1991, p. 9.
[iv] Ellen Neuborne, “CEO pitching new vision for retailer,”
USA Today, April 10, 1991.
[v] Cappo, supra.
[vi] Katz, supra, p. 164.
[vii] Bill Inman, “Boss Bros,” Business, Feb. 1991, p. 55.
[viii] Diana B. Henriques, “Covert Action Against Sears,”
Daily Journal, May 7, 1991.
[ix] Eric N. Berg, “Sears to Cut More Jobs; Profit Falls,”
New York Times, Feb. 12, 1991.
[x] Katz, supra, p. 520.
[xi] Inman, supra.
[xii] Id.
[xiii] Id.
[xiv] Julia Flynn Silver with Laura Zinn and John Finotta,
“Are the Lights Dimming for Ed Brennan?” Business Week, Feb.
11, 1991, p. 56.
[xv] “Update: Sears, Roebuck & Co.” Asset Analysis Focus,
XVII, II, Feb. 28, 1991.
[xvi] Associated Press, May 8, 1991. See “Maverick Pursuing
Seat on Sears Board,” Bridgeport Post, May 9, 1991.
[xvii] Silver with Zinn and Finotta, supra.
[xviii] Id.
[xix] While Sears asserted that the primary purpose was to
raise the proportion of outside directors (all three shifted
directors were employees), they also admitted that the step
was taken as a mechanism to keep Monks off the board. One
Sears executive, insisting on anonymity, said: “That’s the
real motivation of today’s announcement – to keep Monks out.”
[xx] Leslie Wayne, “Boards Shifts Called Manipulative,” New
York Times, March 18, 1991.
[xxi] Editorial, “Let Brennan’s Record Speak for Itself,”
Crain’s Chicago Business, April 8, 1991.
[xxii] Editorial, “Independent Boards,” Pensions and Investments,
April 1, 1991.
[xxiii] Robert A.G. Monks, “My Run for the Sears Board,”
Legal Times, Aug. 12, 1991.
[xxiv] John Schmeltzer and Charles Storch, “Sears Shareholders
Fire ‘Warning Shot’ at Execs,” Chicago Tribune, May 15, 1992,
p. 1.
[xxv] Ellen Neuborne and Michael Osborn, “Mutual Funds, Pensions
Lead the Charge,” USA Today, May 15, 1992.
[xxvi] Patricia Sellers, "Sears: The Turnaround is Ending:
the Revolution has Begun:
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