Bitter battle to oust a CEO
Most ballot filings for corporate director elections are a sure cure for insomnia.
But shareholders of Ameron International Corp. have a real page-turner on their hands ahead of their annual meeting Wednesday.
Management of the Pasadena industrial products company is under attack by a New York hedge fund that says Ameron has ossified under 70-year-old Chief Executive James Marlen.
James Mitarotonda, who heads hedge fund Barington Group, wants a seat on Ameron’s board — and he wants Marlen out, even before the CEO’s scheduled retirement in 2012.
The fight has gotten ugly, and personal. Mitarotonda, 56, says Marlen’s “primary achievement” in 17 years at Ameron’s helm “has been creating wealth for himself and his family.”
Barington revealed in January that Ameron had over the years employed all three of Marlen’s sons, understandably raising questions about nepotism. That may not be unusual for a family-held firm, but publicly traded companies are held to a different standard.
Ameron’s board of directors has come back at Mitarotonda with hammer and tongs, saying he lacks “the integrity and ethics we want in Ameron directors” and that Barington “has been abandoned by the majority of its investors and employees.”
Since the early 1980s, activist investors in the mold of Mitarotonda have been the bane of CEOs and corporate directors. The activists’ rallying cry is “shareholder value” — usually meaning that they believe the stock price could be a lot higher if the business was managed effectively.
At their worst, activists just pick a fight in pursuit of a quick payoff. At their best, they can shine a harsh light on serious abuses in executive compensation and corporate governance that penalize shareholders.
Ameron isn’t a well-known name on Wall Street. The company, which dates back to 1907, produces essential infrastructure components, such as large concrete and steel water pipes, fiberglass pipe for the oil and chemical industries, towers for wind turbines and street-lamp poles. Not much glamour here.
Sales last year were $503 million, down 25% from a peak of $667 million in 2008, hurt in part by depressed private and public construction spending. But the firm has continued to turn a profit, and infrastructure projects should remain a hot area for spending worldwide in the long term.
Enter Mitarotonda. He has been a relatively small player in the activist ranks since 2000, using Barington to agitate for change at companies including auto-parts retailer Pep Boys and plastics maker A. Schulman Inc. Barington took a stake in Ameron in December 2009.
Barington won’t disclose how much money it manages overall but acknowledges that the amount has shrunk since 2007 as some investors have cashed out. Nonetheless, the fund claims that it has earned an average of 11% a year since 2000, while the Standard & Poor’s 500 index returned a scant 0.4% a year.
A year ago Mitarotonda petitioned Ameron to be nominated to its board. He was rejected.
In March 2010, the investor sent a five-page letter to Marlen with ideas for realizing what Mitarotonda said was the “vast value potential” of Ameron. His list included getting rid of non-core businesses such as a stake in a steel mini-mill, giving excess cash to shareholders and “significantly” reducing executive compensation.
Mitarotonda, who declined to be interviewed, has continued to press Ameron on compensation and other issues over the last year. In January, he decided to launch a proxy fight — putting it up to shareholders to decide whether his ideas and his 1.3% stake in the firm should merit a seat on the board.
Marlen expresses astonishment that Mitarotonda would target Ameron. “I would agree very much that hedge funds serve a purpose to be activists, making sure management is on top of things and producing good results,” Marlen said in an interview. But given Ameron’s stock performance, he said, Mitarotonda “has chosen the wrong company to go after.”
Ameron’s stock, at $78 on Friday, has returned 11.2% a year on average, counting dividends paid, since Marlen took over in 1993, handily beating the 8.2% total return of the S&P 500.
But in materials sent to Ameron shareholders, Barington contends that the company’s stock has consistently lagged behind the average performance of its peer group over the last three, five, 10 and 15 years as well as since Marlen took over — an assertion that Ameron disputes.
That’s where Mitarotonda has tried to stir shareholders’ ire, suggesting that they aren’t getting what they’re paying for. From 2004 to 2009, according to Barington, Ameron paid Marlen a total of $45.3 million, far exceeding the $28.3-million average compensation of CEOs of 11 peer companies.
Marlen says that isn’t a fair comparison. In 2004, he notes, he received a $14.3-million lump-sum payment for the termination of a supplemental executive retirement plan.
Even so, for Ameron’s relatively small size versus its peers, Marlen’s compensation appears generous. His $5.9 million in total compensation in 2009 exceeded that of the CEOs of six much larger competitors.
Independent shareholder advisory firm Glass, Lewis & Co. also has taken issue with Ameron’s executive-pay levels, giving the company a “D” grade in pay-for-performance in each of the last three years.
Meanwhile, as angry as Ameron’s reaction has been to Mitarotonda’s challenge, the company has played into his hands by announcing several moves that appear to indicate it was taking his advice.
In August, Ameron decided to separate the roles of CEO and board chairman, though not until Marlen’s scheduled retirement in 2012. The mini-mill stake was sold in September. In October, Ameron announced a special $3-a-share dividend payment and a $50-million stock buyback plan. And the company has hired an executive-search firm to find a new CEO.
Marlen said that Mitarotonda’s suggestions simply “coincided” with what already was underway at the company.
But that hasn’t washed with Glass Lewis, which has advised its investor clients to side with Mitarotonda in the proxy fight.
“In our view, Ameron’s response has been almost entirely reactive,” Glass Lewis said in its report to clients backing Mitarotonda. “We don’t think shareholders should risk the chance that Ameron may lose its newfound momentum to implement positive changes for shareholders.”
Another advisory service, ISS, likewise has recommended voting Mitarotonda onto the board. A third, Egan-Jones Proxy Services, is siding with Ameron.
Marlen, while defending his tenure at Ameron, acknowledges bad judgment in allowing all three of his sons to apply for and accept jobs with the company or affiliates at various points since 1997. Two have since departed the business.
“If there’s one thing I regret, it’s having employed my three sons — not because of performance, but because the perception does not look good,” Marlen said.
“But they shouldn’t hang me for that,” he said. “It’s a perception issue, not a wrongdoing issue.”
