A wake-up call for Odland

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After seeing off an activist investor challenge, CEO Odland gets another chance… but is under pressure to deliver quickly.
After a month of frenzied shareholder wooing and public accusations and counter-accusations, Office Depot’s annual shareholder meeting on 23 April was something of an anticlimax following the eleventh hour withdrawal by activist investor Alan Levan of his two dissident nominees to the company’s board.
After Levan’s 17 March announcement that his Woodbridge Group was nominating former Depot COO Mark Begelman and ex-Staples COO Marty Hanaka to replace current board members Steve Odland and David Fuente, Office Depot’s PR machine swung into action to defend its current and former CEOs, bombarding shareholders with letters and, presumably, meeting with the company’s main institutional shareholders.
At one stage things got a bit nasty, as Depot dragged up allegations of assault (of a female co-worker) that surrounded Hanaka’s departure from Staples way back in 1997 in an effort to undermine the dissident nominees’ bid, claiming that voting Hanaka to the board "may disrupt Office Depot’s significant business with female-owned companies".
Depot also went to town on the recent business credentials of Begelman, Hanaka and Levan, highlighting their "track record of failed business ventures" and portraying them as destroyers of shareholder value.
These are the kinds of tactics usually employed by those who don’t want to focus too closely on their own performance.
Fortunately for Odland, the Woodbridge Group chose a similar strategy by concentrating on the shortcomings of the CEO’s performance over the last year rather than by presenting any structured turnaround plan of its own. This provoked a ‘better the devil you know’ reaction from large shareholder groups (see box below). One by one, shareholder advisory groups came out in support of the incumbent board and when it became clear to Levan that he lacked the necessary support for a real challenge, he pulled the plug on his bid rather than suffer a crushing defeat.
Commenting on the withdrawal of his nominees, Levan said: "Our objective was to provide a strong wake-up call to Office Depot’s board and management team that the current governance, oversight and overall performance of the company are unacceptable and that steps must be taken to increase shareholder value. We believe we have been successful in delivering that message, as well as drawing attention and scrutiny to the unacceptable performance of Office Depot."
Now Odland and his management team will need to demonstrate that they have got what it takes to turn around the ailing giant’s fortunes.
At first glance, the situation doesn’t look too promising with a long list of challenges hanging over Depot. The retail slump in the US looks set to continue in the near term, at least; excuses about the housing market in Florida and California are wearing thin, especially as Staples’ retail exposure in these states is only slightly less then Depot’s; SEC investigations of vendor payments and tipping off financial analysts are hanging over the company; the North American BSD contract division has come under scrutiny after the high-profile contract loss in Georgia and accusations about discrepancies in its California contract; the company’s credit rating has just been downgraded to ‘junk’ status; and staff morale has taken a hit after cost-cutting measures including the offshoring of some back-office systems. The much-vaunted new ‘turnaround plan’ which first saw the light as a mere ‘action plan’ after the 2007 Q3 results still focused heavily on cost reductions rather than growth, and initiatives such as adding more telesales staff are hardly groundbreaking.
The first test for Odland comes on 29 April (after this issue of OPI has gone to press) when the first quarter results are released. It will be too soon after the proxy battle to have a significant impact on the CEO’s immediate future, but all eyes will be on him after that.
We’ll vote for you now, but…
Shareholder support for Odland was ultimately due to doubts over Alan Levan’s nominees’ ability to fare any better rather than a glowing endorsement of the current CEO. Here are some of their observations:
ISS
"The decline in the company’s stock price is substantially greater than that witnessed by its peers. We note that ODP’s current strategic initiatives, announced in response to the deterioration in 2HFY2007 performance, seem to address similar issues that have affected the company since 2005."
Proxy Governance
"A 67 percent loss in share value over just nine months is undeniably striking. If Odland’s execution on his retailing initiatives cannot claw back a meaningful portion of those losses, the board may well be required to take other actions or face a more substantial challenge at the next annual meeting."
Glass Lewis
"We are hard-pressed to understand the compensation committee’s rationale for its $5 million long-term equity grant to Mr Odland in 2008. We note that Office Depot received an F grade in the Glass Lewis pay-for-performance model for 2007."
"It is clear that it is struggling and, in our opinion, the dissident has raised a number of valid concerns. Time will tell whether its directors proactively address the company’s issues and effect positive change for shareholders. If that does not occur, investors should not be surprised to see further shareholder activism."