Did Abercrombie board do enough to satisfy shareholders?

The situation at Abercrombie & Fitch provides an excellent illustration of why shareholder activism has become and will continue to be such a major issue for boards of directors to contend with.
 
The question many observers are asking is this: ‘What is the Abercrombie board doing to protect shareholder interests?’
 
As has been widely reported, Abercrombie & Fitch CEO Michael Jeffries’ contract with the company was set to expire in February when Engaged Capital, a shareholder with a stake of less than 1 percent, sent a letter urging the board not to renew the contract but to begin a search for a new CEO.
 
Abercrombie’s board instead signed a new deal with Jeffries that reportedly keeps his base salary at $1.5 million but contains an annual bonus and incentives to boost his salary that are tied to company performance. According to the New York Times, Jeffries’ compensation has been adjusted to include more long-term equity awards, but still includes many of the perks that made the previous contract distasteful to some investors.
 
The company is also recruiting presidents to revive Abercrombie’s three major brands, Abercrombie & Fitch, Abercrombie kids and Hollister.
 
The Times reports that Abercrombie director Craig Stapleton said the changes came about through ‘an extensive review by the board and detailed discussion with shareholders over several months, and specific terms of Mike’s new contract reflect direct feedback from those discussions.’

Glenn Welling, chief investment officer of Engaged Capital, was also quoted in the Times story, characterizing the board’s decision as made ‘without any substantive discussion with shareholders – a rushed response, less than one week after receiving our letter.’

So which one is right? Did the board speak to many shareholders who will be happy with this solution; or did it rush to provide a solution in reaction to negative media attention from Engaged Capital? We can understand that the board might not have talked to a shareholder with less than a 1 percent stake, but did shareholders with substantial holdings suggest the kinds of changes that were made and nothing more? Boards are paid a lot of money to fix problems, but this ‘solution’ seems inadequate to solve a number of issues, including:
    •    Shareholder distaste for a CEO who has caused the company reputational damage by offending potential customers and other concerned consumers and seems to have a track record of saying things that harm the brand;
    •    The company’s downward slide that has seen share prices fall more than 20 percent in the last 12 months;
    •    Wide shareholder discontent with company compensation plans that have produced failed say-on-pay votes each of the last two years, both receiving less than 25 percent shareholder approval.
 
Of course it could be argued that only time can fix such major problems, but by renewing Jeffries contract, the board has directly tied itself to his success or failure and may have given itself even less time to fix the problems. Shareholders will not likely become more patient given that they’ve endured losses over the last two years, so look to see very active shareholders at the company’s 2014 annual shareholder meeting. You can bet that Engaged Capital will be preparing some type of shareholder action and if the share price hasn’t picked up, it may have company.