Wednesday, June 13, 2007

Bed Bath & Beyond: Don't Confuse Social and Shareholder Activism

Shareholder activism is a way that shareholders can claim their power as company owners to influence a corporation's behavior. Stockholders looking to effect change usually employ similar tools, such as direct dialogue, publicity campaigns, and formal shareholder resolutions (through proxy access).

Today, a common problem confronting activists looking to hold their companies accountable is that the concerns of stakeholders may cover a dissimilar range of issues, from shareholder value creation to corporate governance and transparency to social responsibility (on the environment, international events, workplace equality, etc.).

Shareholder annual meetings are the preferred venues for airing grievances, for advocacy groups have a chance to speak directly with the company boards in a public forum.

Of interest to us, most environmental or socio-oriented campaigns fall down at proxy events—characteristically because the authors of the resolutions fail to frame—or communicate—how their gospel can increase profitability (shareholder wealth).

To be heard above the din, it is not just sufficient to introduce a proposal.
A successful campaign enlists the support and active involvement from large institutional investors and presents a compelling financial argument.

Leaving aside the usual executive compensation issue, two shareholder resolutions of interest on the docket at the July 10 proxy meeting of Bed Bath & Beyond (BBBY-$37.43) are (1) climate change and (2) product impact on consumer safety and the environment.

Shareholder Proposal – Climate Change

Shareholders request that the Board assess how the company is responding to rising regulatory, competitive, and public pressure to address climate change and report to shareholders (at a reasonable cost and omitting proprietary information) by December 1, 2007.

Shareholder’s Supporting Statement

We believe management has a fiduciary duty to carefully assess and disclose to shareholders all pertinent information on its response to climate change. We believe taking early action to reduce emissions and prepare for standards could provide competitive advantages, while inaction and opposition to climate change mitigation efforts could expose companies to regulatory and litigation risk and reputation damage.

How does the Company address the climate change issues raised in this proposal?
The Company is very aware of and responsive to issues related to consumption of natural resources and climate change…. and has continued to extend its commitment to reducing its own emissions.

The proposal on energy efficiency efforts in last year’s proxy statement garnered approximately 25.8% of the votes cast last year, representing about 19.8% of outstanding shares. There does appear to be some appetite among the Company’s shareholders for information regarding the efforts undertaken in the areas of energy efficiency, emissions reduction and broad response to climate change issues.

During the last year, senior management of the Company pulled a team together to coordinate information regarding the Company’s various efforts in the area of energy efficiency and emissions reduction as well as other related issues, to consider ways of possibly publicizing those efforts, and to develop and implement additional measures.

10Q Detective: Climate-change activists failed to clearly craft their message. For example, they neglected to define the vague term ‘competitive advantages.’ In addition, they did not communicate to the majority of shareholders—who are purely financially oriented—any evidence of cost-savings to the company if their proposal were to pass.

This issue campaign will fail, too, because the proponents yielded to management the high ground (letting management shape the content of the argument). To wit:

The Company [has] spent tens of millions of dollars over the last several years on equipment and systems dedicated to controlling and reducing energy consumption in its stores, including retrofitting nearly all Bed Bath & Beyond stores opened prior to 2001 with state-of-the-art conservation systems. As noted in last year’s shareholder letter, by way of example, efforts also involved the use of new, “cooler” roofing materials and more efficient outdoor and store sign illumination.

When completed [solar arrays], these [four] facilities will make Bed Bath & Beyond one of the largest solar energy producers in the State of New Jersey. The combined solar arrays, over a 30-year period, should conserve 109,500 barrels of oil and reduce CO2 by 38 million pounds, the equivalent of removing 3,800 cars from the road or powering 1700 homes for 30 years.


Shareholder Proposal – Product Safety

Shareholders request that the Board publish a report to shareholders on Bed Bath & Beyond policies on product safety, at reasonable expense and omitting proprietary information, by December 2007. This report should summarize which, if any, product lines or categories sold in Bed Bath & Beyond stores may be affected by product safety concerns, and options for new initiatives that management can or will take to respond to this public policy challenge (beyond those initiatives or actions already required by law).

Shareholder’s Supporting Statement

Numerous products sold in our stores contain materials, which are controversial because of their potential health and environmental impacts, such as polyvinyl chloride (PVC) and perfluorooctanoic acid (PFOA). In addition, our company through its Harmon division, retails beauty products, many of which may contain chemicals known to cause cancer, developmental harm to children, and other health concerns.

How does the Company respond to these product safety issues?

The Company respects the point of view represented in the proposal with respect to product content and manufacture process, and the Company monitors developments with respect to these issues through its presence in the markets for these products.

10Q Detective: After the market close on June 4, the home furnishings retailer lowered its outlook for the fiscal first-quarter ended June 2, 2007, to between 36 cents and 38 cents per share, citing the adverse effect on consumer spending due to the sluggish housing market. Analysts polled by Thomson Financial had expected a 39-cent per share profit.

Given the current business climate at Bed Bath & Beyond, save for litigation concerns, it will be difficult for safety activists to argue that the timing is right for management to ignore their fiduciary responsibilities and make the “morally-right” decision.

It is likely, too, that the negative impact of housing turnover, coupled with rising energy costs and interest rates will lead to a pause in consumer spending. Home furnishings is a competitive space. Ergo, to stimulate in-store sales and retain share, BBBY will need to discount prices and increase spending on marketing—pressuring profit margins in coming quarters.

Why does the Company oppose this proposal?

The proposal requests a report on products that may be affected by the concerns raised. There are currently well in excess of 50,000 individual stock keeping units in the Bed Bath & Beyond stores alone, representing goods sold to the Company by over 2,000 separate vendors. There are tens of thousands of additional items in Harmon, Christmas Tree Shops and buybuy BABY stores. As noted previously, the Company is not a manufacturer and does not believe its shareholders would be well served by diverting resources from its core businesses and into chemical research.


Human nature is above all things—lazy. ~ Harriet Beecher Stowe (1811–1896), writer.

10Q Detective: The majority of investors are more concerned about management’s merchandising, store level pricing and execution than emission reductions and PVCs. The aforementioned resolutions will not receive a majority of votes.

Lessons Learned

Social activism differs from dissident activism. Whereas, the former deals with political, environmental, and social issues, the latter validates the creation of shareholder wealth (the public face of a Carl Icahn, institutional investors, and/or hedge funds) as its endgame.

Social activists—in the short-term—will fail because their dialogue with management is never aimed at bolstering shareholder value. To appease all investors, these activists can only become empowered by adding bench strength [institutional shareholders]; be prepared to define the actual cost(s) of change; and, be able to communicate how successfully effecting change will improve overall returns (economic and financial).
Editor David J. Phillips does not hold a financial position in any home furnishings stock. The 10Q Detective has a Full Disclosure Policy.

1 comment:

Compass Roofing said...

Any initiative towards social responsibility, and within looking to conserve and save on energy should be applauded, provided of course it is on a sustainable basis.