Q&A: Haverford Trust CIO Smith Says Target Better Off For Proxy Battle

As chief investment officer of Haverford Trust, Hank Smith had a major interest in the proxy contest between William Ackman and Target's management led by CEO Gregg Steinhafel. Smith oversees an investment portfolio that includes 1.06 million Target shares, and naturally followed the struggle with interest. Rather than viewing it as a disruption or distraction or disappointment, Smith said some good came out of the battle. Even if Ackman failed to get his slate of five candidates elected to the board, his attempt certainly shook up management and may have given them a new appreciation of what investors expected of the company. Which is important considering that the company's investors, themselves energized by the proxy fight, will be putting pressure on the company to improve performance.

Bnet: As a shareholder, what has the proxy battle said to you about Target management, William Ackman, the investor who initiated it, and their concern about the ongoing health of the company?

Smith: Target management is basically saying "if it ain't broke don't fix it." What is interesting and a bit odd is Ackman agrees that it "ain't broke." Ackman agrees Target's management is top notch, seasoned and proven. Also, he says there is nothing really wrong with the board, it is just they could be much better. An irony here is that a board's first and primary responsibility is to have a great management team in place and no one argues that Target does not have great management. One has to question whether Ackman picked the right company to go after. Perhaps, and this is just a conjecture, in early '07 he saw a company where there was potential for a real estate play to create quick profits. By the fall of '07 when he put together a single investment fund, that opportunity was disappearing quickly and then a generational bear market put that fund in a deep hole.

Bnet: Do you think any or all of Ackman's criticisms of Target were well founded and what changes would you like to see, if any, in the retailer's management practices in the wake of the proxy vote?

Smith: We have always had high regard for Target's management. Could they have a less insular board? Yes. Could they have more board experience in real estate and credit cards? Yes. Does Ackman's voice deserve to be heard? Yes, and it has. But Target's stock underperformance in '08 and early '09 had more to do with a higher percentage of sales in consumer discretionary items, which fell off a cliff, than credit issues or real estate issues. You can't blame management for not anticipating a near depression caused by an unforcastable eight week total credit freeze in the fall of '08.

Bnet: Do you think the interaction between Ackman and Target has had an operational affect on the company -- say an influence on the acceleration of the food operation -- and should it have an impact going forward?

Smith: We do not think Ackman has been a distraction for Target. In fact, having him is a win-win for shareholders. Shareholders already had a great management team at Target and Ackman is a brilliant investor. Ackman's involvement might have had an impact on the acceleration of the food operation but more likely the economy is playing a large part: get shoppers in the store that have to first focus on buying staples like food and then, when the economy improves, they will still buy staples but also include more discretionary items.

Bnet: How has Ackman's involvement been a win for Target?

Smith: Shareholders were not going to be in any worse position regardless of the outcome of the proxy battle. There is nothing near term that Ackman's slate could do that would benefit shareholders. At the same time Target's management knows they need to be particularly shareholder sensitive with an activist investors at their doorstep.