A humdinger of a proxy contest has been rumbling on at children’s retailer Children’s Place between the current interim management and the former management such that a committee of concerned shareholders led by former CEO Ezra Dabah has nominated three directors to replace the company’s nominees.
Normally, with a classified board, a corporation could laugh off such challenges, but Mr. Dabah, who has been with the company since 1989, has chosen a year when only the class III directors are being re-elected; three directors and a third of the board, including the recently-appointed independent chair Sally Kasaks. On the other hand the incumbent directors include Mr. Dabah himself, Stanley Silverstein – Mr. Dabah’s father-in-law and another member of the committee of concerned shareholders of the company, and another director Dr. Joseph Alutto who, in a curious turn of phrase according to the 2008 proxy statement “was identified for consideration by the committee by Mr. Dabah” despite the fact that Mr. Dabah does not sit on the corporate governance committee responsible for the nomination of directors. If Mr. Dabah’s new nominees are elected, he would then have potential sway over six of the board’s directors, except that Mr. Dabah has since indicated that if his nominees are elected, Mr. Silverstein will resign. Given the 22% of outstanding stock that Mr. Dabah and Mr. Silverstein say they control, this threat is a very real one.
The mud has been slinging freely and, truly, the company has had its fair share of problems, including an inability to identify a full-time CEO to replace current interim Charles Crovitz. But it has also recently settled two lawsuits – one to do with backdating stock options the other to do with misleading financial statements – in both of which Mr. Dabah as incumbent CEO during the period must have been implicated at least in some fashion. Mr. Dabah is certainly implicated in these issues by the current management. He, of course, claims to be innocent of all impropriety, including securities trading abuses and other corporate governance sins that the current management lays at his door and that it says led to his resignation in 2007. The fact remains that the company’s performance has been relatively disastrous over the last three years. That may be because of Mr. Dabah’s actions prior to leaving rather than as a result of current management’s actions. Current management alleges that the actions it has taken have begun to place Children’s Place on a secure financial footing and cite a 17% increase in stock price in the 21 months since Mr. Dabah’s resignation as well as a number of other core financial successes.
But the share price movement has been anything but constant. In the nine months of 2007 prior to Mr. Dabah’s resignation the share price fell disastrously from over $60 to just over $20 per share. But then after a short rally, it declined even further to just over $15, then climbed, then fell again, then climbed, then fell, and underwent a quick, but small recovery in July that has placed it, well, given the volatility, not that far from where it was when Mr. Dabah resigned.
On the other hand, an impressive array of governance reforms have gone into place since his resignation, including:
Mr. Dabah’s criticisms of the company’s official nominees are scathing (as are the current management’s criticisms of him) including the accusation that chair Ms. Kasaks oversaw an 84% decline in stock price as CEO of Pacific Sunwear and another 27% decline in stock price while CEO of Ann Taylor. He cites Malcom Elvey’s lack of retail experience and Norman Matthews’ age – he is 76 – as preventing him from preserving the “youthful, contemporary image unique” to the company.
It is virtually impossible to distinguish the right and the wrong in this contest and the financial data, particularly given current economic circumstances, are anything but conclusive. The annual meeting on July 31 looks set to be a stormy one. Let’s hope that the majority of shareholders get to have a say.
Paul Hodgson — Senior Research Associate
