Company: Bath & Body Works (BBWI)

Business: Bath & Body Works operates a specialty retailer of home fragrance, body care, soaps and sanitizer products. In August 2021, Bath & Body Works (formerly known as L Brands) completed the separation of its Victoria's Secret business. 

Stock Market Value: $9.68B ($42.42 per share)

Activist: Third Point

Percentage Ownership:  6.02%

Average Cost: $38.16

Activist Commentary: Third Point is a multi-strategy hedge fund founded by Dan Loeb. The fund selectively takes activist positions. Loeb is one of the true pioneers in the field of shareholder activism and one of a handful of activists who shaped what has become modern-day shareholder activism. He popularized the poison-pen letter at a time when the measure was often necessary. As times have changed, he has transitioned from the poison pen to the power of the argument. Third Point has amicably obtained board representation at companies like Baxter and Disney, but also will not hesitate to launch a proxy fight if the firm is being ignored. 

What's Happening?

Third Point initially filed a 13D on Bath & Body Works ("BBWI") on Dec. 8, 2022, and expressed its concern with the company's executive compensation structure, its financial discipline, investor communication and board composition. On Feb. 22, Third Point sent a letter to BBWI's board announcing that it intends to nominate a slate of director candidates for election. Third Point believes that additional oversight is required on the board when it comes to corporate governance, executive compensation and shareholder rights.

Behind the Scenes

Last May, BBWI's CEO Andrew Meslow stepped down from his position, citing health reasons. The board, chaired by Sarah Nash, named her as interim CEO. In its announcement, the company stated that Nash currently served as the CEO of privately held Novagard Solutions, a company that manufactures silicone coatings and sealants. As part of this appointment, BBWI agreed to increase Nash's annual compensation as chair of the company to $1,000,000 from $700,000 during the time she served as interim CEO. Additionally, the company agreed to pay her an annual base salary of $1,350,000 and a short-term performance incentive compensation target of 190% of her base salary for her work as interim CEO. The situation became egregious when the board, in addition, awarded her $18 million of restricted stock units on March 11, 2022. She would receive this $18 million regardless of how long she served as interim CEO. Ultimately, she served as interim CEO for a full seven months for the $18 million.

Would this have happened if an activist were on the board? We don't think so. As an example, in April 2019, ABB chairman Peter Voser stepped in as interim CEO of ABB. He did not receive any increase to his compensation as chairman and he received the same salary and short-term incentives as the prior CEO and no additional long-term incentive grants or benefits, except those legally required. He served as interim CEO for 11 months and received total compensation of $4.2 million, which was $3.3 million less than the prior CEO and $1.7 million less than the permanent CEO succeeding him. ABB was a $50 billion company at the time. BBWI is a roughly $10 billion company. Further, Voser did not have another full-time job back then. For the $4.2 million, he agreed to devote his full attention to ABB. One other thing – Lars Förberg, co-founder and managing partner of activist fund Cevian Capital was on the board of ABB at the time.

Third Point also takes issue with the fact that the BBWI board does not designate Nash as an executive chair even though she is receiving $18 million in stock grants vesting over the next three years. Third Point believes that $6 million of compensation per year renders a director non-independent. We would tend to agree with that. Let's look at another example. Richard Dreiling is designated as the executive chair of Dollar Tree because he is paid a salary of $1 million per year and has stock options to acquire 2.25 million shares of stock at the company's all-time highest closing price, vesting over five years. Before negotiating that deal, the board reached out to shareholders owning more than 50% of their stock. The dominant theme from that outreach was that the company should do whatever was necessary to secure Dreiling's services as the company's top executive for a multi-year period. This is just good corporate governance. Having previously grown Dollar General from a $4.5 billion company to a $25 billion company in seven years as its CEO, Dreiling was imminently qualified for this position. He also did not have another full-time position, and Dollar Tree is a $30 billion company. Finally, Paul Hilal, founder and CEO of activist investor Mantle Ridge was on the board, brought on Dreiling and led the board in structuring and negotiating this entire arrangement.

In contrast, the BBWI board did not appear to reach out to shareholders, did not have an activist or any shareholder representative on the board and seemed to enter an "arms-length" negotiation between Nash and the board she leads. That is how you reach an $18 million payment for seven months of work while holding on to your full-time job. So, Third Point is now going to make a books-and-records request under Delaware law to assess the information the board relied on to justify this payout. My guess is that the support for this decision will be underwhelming.

The Nash-led BBWI board is now doing whatever it can to protect itself from having a shareholder representative on the board. And when I say, "whatever it can," I mean the very least the board thinks it has to do to win. We often see this in activist campaigns at companies with inexperienced and/or entrenched boards. In this case, the board is "refreshing" its membership by adding two new directors to the 12-person board. This allows the board to continue with business as usual, while at the same time enabling it to go before Institutional Shareholder Services and argue that there is no need for a Third Point representative on the board because it has been refreshed. However, when a board has egregious corporate governance practices, its members are the last people you want to appoint new directors. A board like this will need a lot more refreshment than just two additional directors.

The company may also argue that it received an approval vote of over 95% on its most recent say-on-pay proposal in 2022. This vote was entirely focused on 2021 pay and did not include Sarah Nash as a named executive officer. Furthermore, ISS recommended voting "for" on say on pay, but also said that the $18 million Nash award and her overall compensation as interim CEO will be analyzed next year.

Third Point's Loeb popularized the poison-pen letter at a time when it was needed. As times have changed, he has transitioned from the poison pen to the power of the argument. Third Point's letter to BBWI is evidence of that. Third Point has amicably obtained board representation at companies like Baxter and Disney, but the firm will not hesitate to launch a proxy fight if it isn't being heeded. Often the difference between amicable activism and confrontational activism is the response of the company. It is up to the company as to how adversarial this engagement gets. It is often difficult in activist campaigns to identify who is wearing the black hat and who is wearing the white hat. In this situation, it seems obvious. Large institutional shareholders and ISS will not condone egregious corporate governance. If this goes the distance, we believe Third Point will show the BBWI board how powerful a good argument is.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.