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Bolting The Boardroom Door At Sears


Finance

BOLTING THE BOARDROOM DOOR AT SEARS

Most proxy contests are shoo-ins for management. But Sears, Roebuck & Co. isn't taking any chances. To prepare for its May 9 election of directors, Sears plans to spend an astonishing $5.6 million to make sure shareholder activist Robert A. G. Monks doesn't win a seat. It has assigned 30 people to get out the vote against him. It has shrunk its 15-member board to 10, boosting the number of votes he needs to get elected by nearly 50%. It got its attorney, Martin Lipton, the father of the poison pill, to slap Monks with a lawsuit to deny him access to a list of shareholders. It has even purchased a background file on him from a Washington law firm.

Pretty strong stuff, considering that Edward A. Brennan, chairman and chief executive of the $56 billion retail and financial services giant, has publicly stated that he's looking for independent directors and has griped about how tough it is to find qualified candidates. And Monks has blue-ribbon credentials. A Harvard University-educated lawyer, Monks made a fortune in the family coal-and-oil business before rising to become chairman of a leading Boston investment firm. A two-time candidate in Maine for the U. S. Senate, he chaired the Massachusetts Republican finance committee, has held several federal posts, and was President Reagan's top pension-fund overseer. He and his wife, Millicent, are listed in the Social Register.

'SELF-PROMOTION.' Monks, who owns only 100 shares of Sears stock, says he has no interest in gaining control of the company. He's running as one director, not as part of a slate. If elected, he would have to enlist the support of other directors, since he couldn't even second his own motions.

Why, then, is Sears so determined to block Monks's bid? "He's a one-interest activist," says David Shute, Sears' general counsel--and that issue is corporate governance. "He's not interested in the larger views of the company." Sears says that Monks's bid is a "sophisticated form of self-promotion" for a book he coauthored on corporate governance, due out in June. Monks calls the charge "a big lie." Agrees one major institutional investor: "A proxy fight is an expensive way to peddle a book."

Monks says that corporate governance is only part of his aim. He says he's out to challenge Sears' way of doing things more broadly in light of its disappointing 10.26% average return on equity since 1986. "To whom is management accountable?" asks Monks. No one, he asserts. Monks believes he can bring life to a stagnant board, forcing management to meet its stated return-on-equity target of 15%.

Monks also argues that Brennan shouldn't be both chairman and CEO of the company. And, he says, the board's nominating committee--now chaired by Brennan--should be made up only of outside directors. Monks says Sears is spending "money purely to defend their `right' to self-perpetuation and to avoid being held accountable to shareholders." Monks is spending $250,000 of his own to win the 25% of the vote he needs for a seat on the board.

With 344 million shares outstanding, the election is too difficult to call now. To complicate matters, Sears' bylaws provide for "cumulative voting" for the three seats at stake--shareholders can magnify their voting power by casting their three votes per share for one candidate only.

RILED RETIREES. Monks looks like an underdog, though he has some support. On Apr. 17, the California Public Employees' Retirement System, which holds 2.3 million Sears shares, announced it would cast its 6.9 million votes for Monks. Six days later, a group representing 1,000 agents working for Sears' Allstate Insurance Cos. unit asked the Labor Dept. to ensure that they could vote for Monks if they so choose. On May 1, the Colorado Public Employees Retirement System said it would cast its 1.1 million votes for Monks, too. Other groups are also committed to him (table). And there are signs that Fidelity Investments, the $120 billion Boston-based mutual-fund company, which owns about 850,000 shares, may back Monks. It won't comment.

Even some of Sears' 125,000 retirees, irked by a rollback last summer in their health benefits, plan to give Monks their protest vote. "We need some new blood on the board," says Clifford A. Mathys, financial secretary of a retiree group who has already cast his 7,200 votes for Monks. "Brennan is not doing a good job."

Plenty of stockholders say they haven't yet decided how to vote, though. And Brennan has backers, too, who question Monks's bid. "It's a Don Quixote type of thing," says George Reagan of the Teacher Retirement System of Texas, who plans to vote his system's 2.4 million shares for the management slate. "I don't see how he can be anything but disruptive, though I'm not saying he would be."

HARDBALL. Furthermore, Sears' employee stock-ownership plans, the company's largest holders, with a 23.5% stake, have not included Monks in the voting materials they sent to ESOP participants. So at this point, they can't vote for Monks. And the ESOP trustees aren't likely to amend the voting papers unless the Labor Dept., which oversees ESOPs, compels them to. Whether it will do so is unclear. "We will do our damnedest to see that the fiduciaries live up to their responsibilities," vows Assistant Labor Secretary David G. Ball. Sears, however, says when it met with Ball and others on Apr. 26, the department indicated it wouldn't intervene.

Yet Sears is taking Monks's bid seriously. His Rolodex is full of names of the nation's most powerful investors. In 1985, after a stint as head of the Labor Dept.'s Office of Pension & Welfare Benefit Programs, Monks founded Institutional Shareholder Services Inc., a firm that advises many of the nation's largest pension funds on proxy issues. Last September, he quit ISS to pursue his management-accountability crusade.

What's more, he has been a behind-the-scenes player in several successful proxy fights. In 1989, he joined up with Richard E. Rainwater, a former strategist for the billionaire Bass brothers, to defeat a set of antitakeover measures proposed by management at Honeywell Inc. Then, they prodded the company into a restructuring. And last year, Monks and Dallas investor Harold C. Simmons helped force Lockheed Corp. to give institutions more say in picking directors.

Perhaps Sears' best weapon against Monks will be its recent performance. The stock shot up 2 1/8 on Apr. 18 on the news that its net income climbed 91% in the first quarter. While PaineWebber Inc.'s Margo F. McGlade notes that the sale of a shopping center by the company's Coldwell Banker Real Estate Group added about $68 million to that total, the results encouraged some investors.

In the coming days, Sears seems set to keep playing hardball. Says Jay W. Lorsch, a corporate-governance expert at Harvard business school: "It's a dirty fight, and I think it's going to get worse." Other underperforming companies, who may be vulnerable to similar battles, can only hope Monks doesn't pull off a come-from-behind victory.Julia Flynn Siler in Chicago


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