Deals

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

The bizarre manner in which Arconic Inc. CEO Klaus Kleinfeld was ousted leaves the board on the hot seat.

Kleinfeld's removal had been the central focus of Elliott Management Corp.'s campaign for leadership change and improved financial performance at the metal-components maker. As of last week, both he and the activist investor appeared prepared to see this fight all the way through to a shareholder vote next month. Come Monday morning, though, Kleinfeld was out.

Arconic shares rose as much as 9.8 percent, which tells you something about how that vote might have gone down if it had occurred. But in a surprising twist, Arconic says Kleinfeld isn't stepping down because of anything Elliott had criticized him for, but rather because of a letter he sent to the activist investor without obtaining authorization from the board. It's a victory for Elliott, but perhaps not as satisfying as what it had in mind.

Applause! (For Your Exit)
Not exactly what you want to see as a public CEO
Source: Bloomberg

There remains the question of the four independent board seats that Elliott was also seeking. This push for a shake-up had generally come across as more of a means to Kleinfeld's removal, rather than a key objective for Elliott, but the board's handling of the news has shifted the spotlight more harshly onto itself. I wouldn't consider a reprimand for poor judgment to be the kind of CEO exit that should be extolled, but the board weirdly continued to pay lip service to Kleinfeld's leadership and "transformative vision."

In other words, missed financial targets, lagging margins and debatable stock returns provided little cause for Kleinfeld's removal in Arconic's board's eyes. Also apparently fine are questionable corporate governance decisions, including a belatedly revealed voting agreement with a large investor and the seemingly needless triggering of potential change-in-control provisions that could engender a $500 million liability with a successful board shake-up. But that letter, whatever it said, showed "poor judgment" and tipped things over the edge.

That must have been one doozy of a letter. Elliott says Kleinfeld's correspondence read as a threat to intimidate or extort a senior officer of the activist fund "based on completely false insinuations." But it's fair to ask why things got to that point at all. Elliott plans to continue its proxy fight because it doesn't trust the board to make the right decisions in picking the next CEO.

That irritation is deserved. Arconic's board didn't do itself any favors with that flowery praise of Kleinfeld. The simple act of ousting its CEO confirms Elliott's criticisms that something is broken in the leadership of the company. Why pretend otherwise?

Elliott already got the opportunity to recommend candidates for three board seats as part of a 2016 settlement with Alcoa Inc., the predecessor of the now split Arconic metal components business and Alcoa Corp. mining and smelting operations. Now Kleinfeld is gone. Arconic didn't immediately turn to Elliott's preferred replacement -- former Spirit AeroSystems Holdings CEO Larry Lawson -- but it gave the hedge fund the option of supporting Arconic "in facilitating an effective CEO search and a strong transition." What that actually means in practice is still a matter of debate. But Elliott has said it's not committed to a Lawson-or-bust strategy and willing to look at other candidates.

Tale of Two CEOs
While Lawson has his critics, he has a track record of getting results. Kleinfeld also has a lot of critics and more debatable results.
Source: Bloomberg

There may be room for a settlement here, but the onus is on Arconic's board to heed the criticisms of Elliott and other large holders. At this point, it's in both the company's and Elliott's interest to work together to find a capable CEO and get Arconic on track to meet its financial targets and improve margins.

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

  1. Recall that Kleinfeld stepped down as Siemens AG's CEO in 2007 amid an investigation into charges that employees bribed clients for orders. Kleinfeld was never charged with wrongdoing. He reached a 2 million euro settlement with Siemens in 2009. Siemens agreed to pay $1.6 billion to settle probes in the U.S. and Germany the previous year. 

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