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To My Fellow Directors:
I think JC Penney is at a very critical stage in its history and
its very existence is at risk. During a period like this one,
it is absolutely critical that we work together to solve our
problems. It is essential that our board function extremely
effectively or we will certainly fail. In my history as a board
member of many public companies over the last 15 years, I have
never before released a public letter to a board of which I was
a current member. That was admittedly an extraordinary step,
but you should understand that I did so as a last resort after
attempting to negotiate a resolution of my concerns about the
recruitment process with our Chairman and the Company's advisors
over the last week. After having read the board's public
response to my letter and considering the events of the last few
weeks, I am concerned that a small subset of the board is
negotiating and speaking on behalf of the full board, that the
rest of the board has not been properly informed and has not
been given an opportunity to express its views, nor is even
included in deliberations about what to do.
A proper functioning board needs to be fully informed about all
material facts about a corporation in order to make deliberate
and intelligent decisions. Extreme candor among directors is
critical. Directors need to hear from one another in an open
forum so all issues can be aired in a transparent fashion.
Directors must put personal relationships and issues aside that
might color their decision-making process. The board must be
led by a Chairman who is unbiased, can make decisions without
regard to personal relationships, and focused only on what is
best for the corporation.
In recent weeks, our board has ceased to function effectively.
Material information is not being properly shared with the
board, and the board does not have access to independent advice.
As the Chairman of the Finance committee, I need to have full
access to the financial affairs of the corporation in order to
help lead the board in making critical financial decisions in
fulfilling my fiduciary duties. When Mike became CEO, he
terminated Alix Partners and cutoff Blackstone from access to
information and a role in assisting us in analyzing the current
state of affairs. My team was similarly cut off from access to
information. This is despite the fact that when I joined the
board, the Company explicitly agreed in writing to allow the
Pershing Square analysts access to information so that they
could assist me in analyzing the financial affairs of the
Company. Alix Partners and Blackstone were hired by the Board
to assist the Board in its deliberations and to help the Company
in controlling cash, expenses, and future commitments. It was
entirely inappropriate for Mike to terminate the board's
advisors without the board's knowledge or consent. We are now
flying blind.
While I like Robert Pruzan and Centerview, they are Mike's
advisors, not the Board's financial advisors. They are
conflicted, therefore, in providing independent financial advice
to the board. Robert is therefore not likely to recommend that
Mike should be terminated, nor is he going to criticize any
decisions that have been made by Mike. He is not going to show
us projections that would lead one to the conclusion that
management should be changed. We are therefore not able to
receive the objective advice that we need in order to make
intelligent decisions.
Bob Peterson and Susan Ray were very helpful to me and my team
and the board in understanding what was going on J.C. Penney.
I, and I believe, the rest of the board thought very highly of
both of them. Once Mike became CEO, Bob and Susan said they
were no longer authorized to answer our questions. When I
confronted Mike directly, he reluctantly agreed to allow Bob and
Susan to speak to my team. Last week, Bob was constructively
terminated (his strategy position was eliminated and he was
offered a middle-tier position in the finance department, so he
quit). I was told that Susan was fired last week. I do not
know the basis for her termination.
Material hiring and firing decisions are being made without the
board being properly consulted. Our marketing has been a major
problem. I thought we had begun to make material progress when
Sergio was brought in as a consultant. Marketing messages were
tested. Data were generated to determine ROIs of our various
campaigns. Traffic was recovering, Mother's Day was strong, and
we appeared to be recovering. Unfortunately, Mike fired Sergio
without the board's consent. He has now hired Debra Berman, a
friend of Mary Beth's from Kraft. No other candidate was
considered for the position as far as I know.
Up until Mike's current tenure, there was a process for hiring
executive officers. They would be vetted, at a minimum, by the
compensation committee, and their package would be considered by
the committee and recommended to the board for its approval. In
light of the fact that Ms. Berman is a friend of a director,
particularly one who is Chairing the search committee, this new
executive's hiring should be analyzed with greater scrutiny.
Sometimes CEOs hire friends of directors in order to curry favor
with those directors. While I am not suggesting that this is
what has happened here, proper process was not followed in this
personnel decision.
Furthermore, in light of the criticality of this role and the
difficulties we have had in this area, one would reasonably have
assumed that the full board would have had the opportunity to
interview Ms. Berman. That could easily have been accomplished
at the last board meeting for apparently her hiring was being
negotiated at that time. As Allen Questrom pointed out in his
interview on CNBC yesterday, the decision to hire a consumer
packaged goods marketing executive as the CMO of J.C. Penney is
a strange decision. The skills and experience one learns from
marketing lunch meats and American cheese to consumers are not
logically applicable to marketing JCPenney to our customer base.
Imagine my surprise when I learned of Ms. Berman's hiring from a
press release on my Bloomberg machine. Unless the compensation
committee met to consider Debra without me, Mike hired Debra
without the approval of the comp committee. I and other
directors still do not know how much she is being paid, how much
equity she has been granted, etc. This is entirely inappropriate
in my view.
I am very concerned about personnel decisions that are being
made without the board being asked for its consent or even
notified. It appears to me that a lot of other qualified
people have been terminated, individuals with no experience in a
particular function are given important roles in that area, and
that some very questionable hiring decisions have been made.
For example, at the last meeting, Mike mentioned that he had
made a member of the merchant team head of real estate and
construction even though she has no background in real estate or
construction.
When Mike first joined as our interim CEO, he told me that he
intended only to hire one or two people total. This made sense
to me because interim CEOs do not make many material hiring
decisions (those are left for the new CEO) and instead focus on
recruiting a new CEO. While the board agreed that it would take
the ‘interim' out of Mike's title to assist him with working
with the team in Plano, Mike was hired by this board as an
interim CEO. He has not acted like one. When Mike was asked
about succession at the last board meeting, he said that he did
not know of any other executive who could run the Company. I
learned yesterday from an analyst that Mike had told her and the
other members of the analyst community that he was not an
interim CEO, but the board's long-term choice. Mike provided
the analyst community with false information. That explains
why the analyst community was so surprised yesterday to hear
that the board had started a search process. If Mike had told
the truth that he was indeed an interim CEO, there would be no
disruption in revealing that a search process was underway.
Compare how Mike has handled the situation with A.G. Lafley, the
interim CEO of P&G. The situation is remarkably analogous.
P&G's board made a decision to replace CEO Bob MacDonald. Not
having an immediately obvious candidate to promote internally or
from the outside, the board brought back A.G. Lafley, the former
CEO, as an interim CEO. As the interim CEO, Lafley immediately
began a process to identify the next CEO and gave a story the
following week to the Wall Street Journal so that there was no
confusion about Lafley's interim status.
I am also very concerned about the budgeting process. We
received three different financial projections - a new one at
each of the last three board meetings - each one projecting
worse results than the previous one. Most disconcerting was
Mike's disavowal of the first two projections when he explained
at the last meeting that those were not “his numbers.” I find
this particularly troubling because these projections were
presented by Mike himself to the board in May and in June so it
is hard for me to understand why he should not have ownership
for May and June's projections. Now Centerview is running a new
set of numbers.
In light of the uncertainty about our projections, I am also
extremely troubled about the aggressive inventory purchases and
future commitments we are making for later this year and 2014.
Yesterday, I received a call from one of the Company's largest
vendors who explained his concern about the number of purchase
orders he has received from the Company. When a vendor
expresses concern that J.C. Penney is buying too much, we need
to take a very hard look at the commitments we are making. In
my opinion, Mike is overly optimistic about the near-term future
of J.C. Penney. This vendor recommended, and I agree, that JCP
should be making only conservative inventory commitments and
then chasing inventory in the event we sell beyond our
projections.
Yesterday's press release implies that my letter was the first
time the board was made aware of my concerns about the hiring
process. As you know, for nearly four months I have been
advocating for the promised search process to be launched. Last
Friday, I wrote a several-thousand-word email to the board
outlining my concerns about our current trajectory and the need
for a rapid search process. I asked the board to consider my
thoughts over the weekend. When Tom wrote back on Monday
dismissing my approach, I assumed that the full board had met to
consider my concerns and that Tom, as the spokesperson, was
accurately representing the views of the outcome of that
meeting.
I later learned that no such meeting had taken place and that
Tom had simply called directors individually. A director I
spoke to earlier this week explained that they agreed with my
approach for an accelerated search process, but Tom did not a
call a meeting so they could share their views with other board
members. Boards must have the ability to deliberate openly
amongst one another so that all points of view can be adequately
discussed. By not calling a meeting, Tom prevented the board
from properly functioning and fulfilling its fiduciary duties.
Beginning on Monday, I and my counsel attempted to negotiate a
resolution of our differences. We proposed that the Company
publicly disclose that a search process had been launched and
that the Company commit to an accelerated time frame. My
counsel and I negotiated with Chip Delaney of Skadden and Rob
Pruzan. I assumed that the board was being informed about our
request and the advisors were representing the full board's
views on this issue. My argument for public disclosure of the
search process was based on the fact that a search process would
likely leak as the search firm contacted potential candidates.
We believed that the leak would be more damaging and disruptive
to the Company than if we affirmatively told the world what was
going on. I also believed that publicly announcing the process
would keep the board focused on getting the search done
promptly.
After our proposal had been rejected by the advisors, I decided
to write yesterday's letter and release it to the media because
I thought it was the right thing to do as a fiduciary for the
Company and its shareholders. Sometimes being “disruptive” is
exactly what a Company and board needs at a critical time.
At our last board meeting at the first evening's executive
session, Tom terminated our discussion despite directors asking
for the opportunity to continue to discuss our concerns. As a
result, the executive session we held at the end of the
following day did not give the board an adequate opportunity to
discuss our affairs as many directors had to leave to make
flights home. To state the obvious, executive sessions require
sufficient time so all issues can be fully discussed and
debated, and important decisions can be made.
I am concerned that personal relationships and potentially other
business dealings outside of JC Penney are affecting certain
board members' judgment. While I do not know whether Tom is
still splitting his GV aircraft with Mike - perhaps not, because
Mike has access to our two G450s (one has to ask the
appropriateness of our aircraft fleet in light of the current
state of the Company) - these type of outside business dealings
can color the thinking of our board when independent judgment is
most needed. As a result, I would like the full board to be
provided with full and fair disclosure on any directors'
business activities or financial dealings, charitable donations
or activities, outside board involvement with Mike or JC Penney
of any kind so that the full board is informed of the potential
for any director conflicts.
I have lost confidence in our Chairman's ability to oversee this
board. I would therefore recommend that Tom be replaced as our
Chairman. Allen Questrom said on TV yesterday that he is
willing to be our Chairman in the event we meet certain
conditions; namely, he is not willing to step into a hostile
situation and he must be comfortable with the CEO we designate.
If we join arms and this conflict behind us, reach out to Allen
as a full board, and commit to move forward with an accelerated
search process, I believe that Allen would come on board to help
us right away. With Allen as our new Chairman, we would have
the benefit of one of the great retail CEOs in assisting us in
overseeing the Company at this critical time, and we would have
his input and direction in selecting our next CEO, something
with which he has enormous experience and relationships.
I hereby request that we hold a board meeting as soon as
possible so that the board can deliberate and make decisions
about all of the above.
Time is of the essence. Hopefully, this is the last board
letter I need to release to the press.
Sincerely,
Bill
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