The Timken Co.'s plan to split its businesses into two separate publicly traded companies takes shareholder activism to a new level, putting more pressure on companies to improve corporate performance.
The Timken breakup plan embraces a proposal filed by the California State Teachers' Retirement System and Relational Investors LLC. The company vigorously opposed the intervention until shareholders voted 53% in the majority in support.
The groundbreaking proposal took shareholder activism beyond just seeking to improve company accountability on corporate governance issues by replacing directors, or on social and environmental issues, or by aligning executive compensation with company performance.
The two proponents sought to intervene in the operations of the company, an area shareholders generally leave to the judgment of the board and management.
But in the CalSTRS and Relational view, the company was significantly undervalued because of its consolidated business structure. The proposal by the $170 billion West Sacramento-based CalSTRS and Relational goes to the heart of Timken's business. CalSTRS and Relational officials say spinning off the industrial company's steel operations from its bearings business will unlock shareholder value.
To its credit, the company — in the face of the voting outcome — undertook an analysis of the non-binding shareholder proposal and other options for improving shareholder value, including the status quo that it defended until the vote. Its analysis concluded the separation into the two companies, announced Sept. 5, “was the best course of action” to improve shareholder value, as stated by Ward J. “Tim” Timken Jr., board chairman, in a conference call with investors.
Some academics and others have criticized shareholders for intervening in what should be matters for the board, from executive compensation to the structure of a company's business operations. But when the board's plan for improving shareholder value is failing, shareholders should step in to provoke the board to take another look.
Shareholders no longer are content to vote with their feet and sell a stock to move on from flagging performance. Because of the buy-and-hold indexing approach to investing, as well as shareholder activist investment strategies, as practiced by Relational, companies have to become more responsive to shareholder demands.
Pension funds, long awakened to the challenge of active investment management outperforming passive index investing, might see the CalSTRS/Relational success as a new path to outperformance.
They should. Their pressure on the company has sent the stock soaring. From Nov. 27, the day before CalSTRS and Relational announced their proposal, to the shareholder vote May 7, Timken stock's total return was 36.4%, compared with the 17.3% total return of the Standard & Poor's 500. Since the vote through Sept. 5, the stock's total return was 8%, compared with 2.6% for the index.
But shareholders cannot expect to duplicate such success at any company without the knowledge and effort pension funds like CalSTRS and money managers like Relational have put into corporate governance and shareholder activism. Their analysis has to be solid. And they have to have the strength to stand by their conviction as CalSTRS and Relational did with Timken in the face of extreme pressure by the company assailing their analysis. That confidence comes from CalSTRS' leadership with strong fiduciary commitment to participants under CEO Jack Ehnes, CIO Christopher J. Ailman and Anne Sheehan, director of corporate governance.
Success, too, depends on the company. For its part, Timken deserves recognition for reversing course when shareholders voted to upend the status quo. Timken's two companies now need to see that they have the right board members and management to generate long-term sustainable performance. It should engage shareholders to seek their advice on the makeup.
The decision to break up the company is just the first step in the generation of long-term investment returns, and the jury will be out for some time on whether the strategy's a success or failure for shareholders.