Hunton Retail Law Resource

Earlier this month, proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis recommended that shareholders vote for retailer Chico’s FAS Inc.’s (“Chico’s”) board of director candidates, instead of the two candidates nominated by activist investor Barington Capital Group LP (“Barington”). This prompted Barington to abandon its proxy fight.

The decision by ISS and Glass Lewis to support Chico’s is somewhat surprising, as proxy advisory firms have often been supportive of activist investors’ efforts to replace directors at struggling companies. Barington had supported two of Chico’s four director candidates, but proposed replacing the remaining two with its own nominees. In an effort to gain support for its candidates, the activist investor cited Chico’s underperformance and framed one of the company’s nominees as having a conflict of interest due to her ties to other retailers.

Providing the reasoning behind its decision, ISS noted in its report that Chico’s had already begun making positive changes to turn around the company for over a year, and its efforts were specifically aimed at tackling the root causes of its underperformance. ISS also remarked on the high quality of the company’s nominees and noted that rather than having a conflict of interest, the company’s nominee with retail ties offered valuable retail experience that could be leveraged to assist Chico’s in its efforts to improve performance.

Glass Lewis’s report also noted that Chico’s had begun implementing changes prior to involvement by Barington, and had already introduced several organizational cost-saving initiatives. Additionally, Glass Lewis commented that CEO Shelley Broader, who has been in office less than a year, should be given more time to continue with the company’s strategic plan and produce results. The firm also echoed ISS’s sentiments regarding the quality of Chico’s nominees, stating that Barington did not demonstrate that its nominees were more qualified than the company’s nominees. Further, Glass Lewis found it “illogical” for Barington to target a new director candidate and a candidate who had only served on the board for a few years and attempt to hold them responsible for board failures that predated their service.

These proxy advisory firm decisions illustrate factors that may provide guidance for other companies facing potential proxy fights from activist investors. Chico’s experience shows that proxy advisory firms may be more understanding of companies that are clearly making strides to improve lagging performance and are proactively responding to valid criticisms from investors. To the extent that a company can demonstrate how its slate of director candidates is uniquely qualified to help the company tackle its weaknesses, develop a comprehensive plan to address current issues, provide evidence of recent improvements and clearly communicate its efforts to shareholders, it may have a better chance at receiving support from proxy advisory firms. It is incumbent on companies to keep a finger on the pulse of shareholders and begin working on any issues as they arise, if they wish to have a greater chance of withstanding activists’ pressure.