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Target Triumphs over Ackman

One of the most bitter proxy fights in recent history ended May 28 with a clear, albeit not surprising, victory for management as Target (TGT) shareholders rejected a hedge fund provocateur's proposal to install new directors, according to preliminary vote totals.

The Minneapolis retailer said in a statement that its shareholders elected four incumbents "by a comfortable margin" over activist shareholder William Ackman's five picks, which included himself. "We thank our shareholders for their overwhelming support throughout this process," Target CEO Gregg Steinhafel said in a press release.

At an unfinished Target store in Waukesha, Wis., where the company held its annual meeting, Ackman emotionally addressed the crowd of several hundred and answered questions from shareholders before the vote.

Experts Not Surprised

Despite his pleadings, shareholders disagreed with Ackman's contention that the board was insular and required fresh perspectives that could be supplied only by his slate of five candidates, which included former Starbucks (SBUX) Chief Executive Jim Donald, who helped build Wal-Mart's (WMT) grocery business, and Richard Vague, former CEO of credit-card firm First USA.

Ackman's Pershing Square Capital Management owns a 7.8% stake in Target stock and options. After Target rejected his November 2008 proposal to spin off the land under the retailer's stores into a real estate investment trust, Ackman turned to shaking up the board of directors. He maintained that Target's board lacks significant shareholder representation because its members own less than 0.3% of the business.

Retail and governance experts were largely not surprised by the vote. "There are few proxy battles actually won by the outside activist, and Target exhibited few characteristics of a poorly managed company despite current performance," says Neil Stern, senior partner at retail consultancy McMillan Doolittle. However, Stern added that "Ackman's push for a more skilled board was not all wrong."

Targeting Sol Trujillo

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware's business school, said he thought the vote would have been tighter, given Ackman's tireless efforts. But in the end, Target was a "weird" choice of company to attack, he argued. "You have to pick your fights carefully," he said. "You need to choose a company with performance and governance issues."

In particular, Ackman went after longtime Target director Sol Trujillo, the former CEO of Telstra, the Australian telecommunication company, citing his 15-year tenure on the board and lack of relevant experience to deal with Target's current woes. Ackman also argued that Trujillo's recent change in employment status required him to leave the Target board. In February, Trujillo said he would step down from Telstra, ending months of speculation about his tenure. Ackman made the same argument about director Anne Mulcahy, who recently decided to step down as CEO of Xerox (XRX).

Ackman got a boost in mid-May when proxy advisory firm RiskMetrics Group (RMG) recommended that shareholders vote for Ackman and Donald. But another proxy-research firm, Glass Lewis, endorsed Target's full slate.

Recession Is Main Foe

Earlier this week, the preternaturally confident Ackman said he would retain his personal Target stake, now worth more than $55 million, for at least five years if he was elected. It's unclear now whether he will retain that stake or sell it.

Target may have beaten back Ackman, but it's still battling a much tougher foe—the recession, which has exposed a weakness in Target's "cheap chic" offering that is heavy on discretionary items and light on the everyday food and general merchandise that has helped rival Wal-Mart thrive during the downturn. Only 37% of Target's sales are in consumables, vs. 59% for Wal-Mart, according to Leon Nicholas, director of retail insight at consultancy MVI. "Target's 'Expect More' image does not play well in this economy," he says.

Target's sales growth has trailed Wal-Mart's for five consecutive quarters, starting in the winter of 2007 as the economy weakened. For the previous four years, Target's sales growth regularly outperformed that of its Bentonville (Ark.) rival.

As the economy improves, though, so should Target's performance, experts say. "There are few companies better positioned than Target to take advantage of the recovery," says Ken Harris of consultancy Cannondale Associates. That said, Target will not soon forget the lessons of its battle with Ackman. "In a self-effacing culture like Target's, there is no gloating in victory," Harris says. "Rather, there is a resolve to do better."

Boyle is deputy Corporations editor for BusinessWeek.

Boyle is a reporter for Bloomberg News and Bloomberg Businessweek in London.

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