Even in Wilmington, investors split as DuPont faces May 13 board fight

This year, the vote to pick directors to oversee the DuPont Co. in advance of the company's Wednesday, May 13 board meeting looks like a political campaign, instead of the usual corporate rubber-stamp.

In the weeks before DuPont's annual meeting Wednesday, shareholders -- nearly 2,000 mutual funds, pension funds and other large investors; plus 600,000 DuPont retirees and other individual investors, who own 30 percent of the company -- are fielding daily calls and mailings, from both the Wilmington-based company's chief executive and chairman Ellen Kullman, and from billionaire activist Nelson Peltz's Trian Fund Management.

Each claims a better vision for the future of the $35 billion (yearly sales), 63,000-worker, multinational bio- and chemical-materials giant, the only Philadelphia-area company listed on the Dow-Jones Industrial Average of 30 dominant American companies.

Peltz says DuPont suffers from swollen management, old-fashioned thinking and a weak board, and that his victory would push cost cuts and a review of research and other expense, and asset sales. His company has nominated Peltz and three other directors to oppose four of 12 incumbents on the company's slate.

Kullman has pushed back by defending her own record at selling old assets and streamlining growth businesses -- and warning Peltz is likely to pile on debt, which analysts at Moody's Investors Service and Standard & Poor's credit ratings agree would threaten the company's credit and its bondholders.

Both sides take credit for DuPont's recent share price rise. Trian expects to spend $8 million pushing its campaign; DuPont, to spend $15 million resisting.

How will the vote go?

DuPont's largest investors are big fund companies -- BlackRock, State Street Corp., and Malvern-based Vanguard Group each own at least around 5 percent -- which declined to tip their ticket before the vote. (Vanguard announces its shareholder votes each August, said spokeswoman Linda Wolahan.)

The three firms each say they are open to supporting challenges by activists like Peltz, who forced his way onto the Heinz Co. board in his last contested election, in 2006, leading to the Pittsburgh company's later sale, higher debt, higher profits, layoffs and shareholder gains.

In contested board elections last year, BlackRock voted for management candidates slightly more than twice as often as it backed dissidents, according to a report last week by Los Angeles investment bank Houlihan Lokey. State Street was more than six times as likely to back management, and Vanguard seven times more likely to support management.

But in DuPont's case, three independent proxy advisory have all endorsed Peltz; one, Sean Egan's Haverford-based Egan-Jones Proxy Advisors, backed his whole four-person ticket. Peltz's endorsement by the largest of the advisories, Institutional Shareholder Services, could swing "20 to 40 percent" of investors to Peltz's side, University of Delaware finance professor and corproate-governance scholar Charles Elson told me.

On the other hand: a recent open letter by BlackRock boss Larry Fink draws a sharp distinction between long-term activist investors with solid plans; vs. short-term quick-buck artists attacking capable managers. Fink is indiciating "support from BlackRock for good boards that may be unfairly targeted by activists," Matthew Taylor (corrected), analyst at Berwyn-based Cheswold Lane advisors, told me. Will DuPont's Kullman fit in that category?

A few big investors have taken sides publicly. On Thursday, the California Public Employees Retirement System (CalPERS), the nation's largest state pension investor, says it has voted its 6.5 million shares (about 0.7 percent of DuPont's total) in favor of the DuPont incumbents.

"DuPont has outperformed the S&P 500 and its (chemical) industry peers over 1, 3 and 5 years," including Kullman's term in oiffce, CalPERS said in a statement. Peltz and his Trian allies, in contrast, "do not have sufficient industry experience." CalPERS added that "the Trian focus is relatively short term" and threatens research cuts and higher debt.

CalPERS's pro-management stance contrasts with that of the California State Teachers Retirement System (CalSTRS), which has a smaller investment in DuPont, and which has said it will support Peltz. .

"We've voted for Peltz," Michael Crofton, president of $1.8 billion-asset Philadelphia Trust Co., which controls more than 50,000 DuPont shares, told me. "Peltz is a raider," Crofton said approvingly. "DuPont management is pretty wedded to old ideas of corporate structure. But the world has changed. It's probably time for a phrase of de-conglomeratization. I think Peltz will drive the stock price into the $90s" by breaking up DuPont.

I asked Crofton why DuPont director Ed Breen, who as Tyco International chairman enriched himself and other investors by breaking up the conglomerate, was backing Kullman instead of Peltz. "They all get so where they don't want to rock the boat," Crofton said. "That's why they need fresh air."

The longtime head of a Wilmington money management firm told me he wasn't free to talk for the record because his clients, who old over 100,000 DuPont shares, are divided. He said he's searched many pages of Peltz's analyses of DuPont but found no reason to expect Peltz will be able to boost profits more than Kullman already has -- other than by "savage cost-cutting." But some of his clients -- even in Wilmington -- are hoping for quick cuts and a jump in the share value so they can cash out, he added.

DuPont family members who remain shareholders are watching closely. "Frankly, I am concerned about the value-destructive agenda and break-up strategy, proliferated by an activist shareholder who does not have the knowledge of DuPont's businesses or industry," says Ben du Pont, a shareholder and managing director of investment firm yet2Ventures based in Wilmington.

Du Pont praised Kullman and her board as "change agents" who are "relentlessly" preparing the company "for the long haul." Trian represents "an unacceptable level of risk, especially at a time of already major change."

Similarly, Eleuthère "Thère" du Pont, a DuPont Co. director and former Wawa executive, is expected to vote family-backed Longwood Foundation shares in the incumbents' favor. (Thère, a former top Wawa executive, and Ben are sons of former Delaware Gov. Pierre S. "Pete" du Pont IV, and his wife, Wawa heiress Elise Wood du Pont.)

But DuPont can't take even Wilmington for granted, as its saturation advertising campaign in the major Delaware print media (which the family divested in the 1970s) shows. (Trian is also buying local news ads, including a page in Sunday's Inquirer.)

"There was a lot of conversation about this at the Point-to-Point last weekend," said Chris Long, a Wilmington foundation director, citing the yearly horse-and-carriage pageant at the Winterthur estate in northern Delaware's chateau country." Among private-equity investors, "the unaninmous consensus was that Nelson Peltz is the guy that they would bet on." Real estate people also claim to see a DuPont break-up as a catalyst for future growth, he told me: some Wilmington real estate people "think DuPont would be much healthier with some shaking up."

"I voted the white card," for the incuments, and against Peltz, said David Reifschneider, a former DuPont engineer turned college administrator. "I have a major dislike for thse hedge fund managers. I look at what Peltz did when he bought Chemtura," a chemical maker, in 2007. "They were bankrupt six months later."

DuPont has been cutting costs relentlessly since it took the major step of closing its corporate-wide engineering center at Louviers, near Newark, Del. -- in 1993, Reifschneider added. Since then, "Ellen is the best of the CEOs I've seen there," he said. The engineer laughed at the suggestion DuPont would be better in pieces. "To break the company up and hire all new administration to run it, is that more efficient? That's a ridiculous analysis."

"This is a very strong wake-up call to Delaware," Charles Copeland, a businessman and former Republican state senator in Democrat-dominated Delaware (and a du Pont cousin), told me. "The days of big-company largess to the local community is gone. When I was growing up, if you worked at Uncle Dupie, you got a job for life. Today it's all about shareholder return," and Trian's victory or defeat won't change that much.

"'I've known seven CEOs for DuPont. Ellen without peer has been the boldest in her latership," said Sam Waltz, a veteran Delaware publicist and publisher emeritus of the Delaware Business Times. "Ellen has been giving investors what they wanted. She has given them what Trian wanted," he said.

"To the extent a lot of DuPont investors are Delaware-centric, all the advisory opinons will not substitute for their close-up jdugement that Elle, a hometown gal, is navigating DuPont about as well as anyone could be expected," Waltz added. He "will be shocked" if DuPont doesn't win. He will be less shocked if the company then offers Trian a board seat anyway, and everyone moves on.

"We are encouraged by the meetings we have had with the institutions that own DuPont," Ed Garden, Peltz's son-in-law and comrade at Trian, told me. He said his firm takes credit for boosting DuPont's stock every time it announced it was accelerating its challenge.

Trian is eager to unseat DuPont lead director Alexander Cutler, head of Eaton Corp., who Garden said has failed to challenge Kullman on her personal share sales, on the board's award of bonuses even in years when the company repeatedly failed to meet its profit targets, and on the terms of spin-offs like the 2013 Axalta deal, which he says enriched private-equity buyer Carlyle Corp. at DuPont shareholders' expense.

"We don't do this lightly," Garden concluded. "We take no pleasure in taking management to task publicly." But given DuPont's performance, and its potential, "we can't be passive." (Another version of this story in my column in the Sunday Philadelphia Inquirer).