Arconic's 'We Alone Can Fix It' Response to Elliott Falls Flat

(Bloomberg Gadfly) -- Arconic Inc. is having a "we alone can fix it" moment.

The board of the $12 billion aluminum-parts maker, under pressure from activist investor Elliott Management Corp. to fire CEO Klaus Kleinfeld, published a letter last Thursday arguing among other things that it's "uniquely positioned" to make the call on his employment and the company's strategic direction. It dismissed Elliott's complaints about lagging margins, misguided capital allocation, underwhelming shareholder returns and out-of-date corporate governance policies as a ploy to enact the "preferences of a hedge fund with no experience operating Arconic's business or navigating the challenges that Arconic has faced." Um… what?

First of all, I don't even know what the board means when it says in the letter that Elliott's campaign "is not really about changing Arconic's board composition, governance or strategic plan." That's exactly what Elliott is asking for. Implying something else is at play here makes little sense; if Elliott wanted to come in and just make the stock pop, it could have easily sold already. You can debate whether activist investors succeed in creating value over the long term for other holders (a 2014 Bloomberg News study found they do, on average), but most, especially those of Elliott's size and reputation, at the very least have that goal. 

Arconic also accuses Elliott of trying to exert "undue influence" over the company's board and leadership. It's a fair question because Elliott has already chosen three of the board's directors as part of an agreement with the company's Alcoa predecessor. Does it really deserve the five seats it's now seeking? On the other hand, most of Elliott's criticisms have been leveled at Kleinfeld and its concerns about the board have had a lot to do with its failure to remove him so the board revamp seems to be more of a means to an end than a goal in and of itself.

To say that Elliott is trying to get other investors to defer to its "preferences" also ignores the fact other large holders have rallied around the activist's call for a management shakeup. Those investors aren't short-term hedge-funders; First Pacific Advisors, for example, emphasizes value investing and built up a sizable stake in Alcoa Inc. in 2013, according to data compiled by Bloomberg, years before the company separated the Arconic aluminum-parts business from the Alcoa Corp. mining and smelting operations. It's now among those calling for governance changes and speaking out against a board it sees as largely not economically aligned with shareholders because of its small collective stake in the company. Shouldn't First Pacific Advisors' "preferences" count for something?

Attempting to play up the board's objectivity seems to have backfired for Arconic. Investors like Elliott and First Pacific have skin in the game so it's sort of their job to be biased in favor of things that make the share price go up. Orbis Investment Management Ltd., another big and long-standing holder, seemed to take specific issue with this. Per a letter issued on Friday, ''independent members of this board, who own less than 0.1% of outstanding shares, continue to disregard the overwhelming publicly-expressed desire for leadership change from the company's largest long-term owners." You set yourself up for that one, Arconic.

Elliott's "preferences" must be somewhat valid considering that Arconic has just decided to propose some of the activist investor's requested changes for itself. The company submitted a kitchen sink of corporate governance updates last week for shareholders to vote on including declassifying its board structure so that all directors are elected annually and eliminating a super-majority voting threshold now required to amend its bylaws. It will also establish a special committee to review M&A and capital expenditures and make changes to its executive compensation structure. If Arconic's board is so "uniquely positioned" to steer the company in the right direction, why did it wait until after Elliott raised some of these issues to do something about them? Alcoa seems to have found the time to improve its corporate governance following the split in November.  

Maybe there's something to these shareholder "preferences" after all. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.