CEO of Trucking Supplier Arconic Exits After ‘Poor Judgment’
Elliott Management Corp. vowed to continue a fight to replace board members from trucking supplier Arconic Inc. even after the main source of its dissatisfaction, CEO Klaus Kleinfeld, stepped down.
Shareholders can’t trust the board and should support Elliott’s slate of dissident directors in a vote next month, the New York hedge fund said in a statement April 17. Kleinfeld’s departure was “long overdue,” Elliott said. The CEO exited the aluminum-parts maker after the board said he showed “poor judgment” in sending a letter to Elliott amid a proxy fight.
“The letter read as a threat to intimidate or extort a senior officer of Elliott Management based on completely false insinuations, a threat that we took seriously and about which we immediately and privately informed the Board,” Elliott said in the statement.
Until April 17, Arconic’s board had stuck by Kleinfeld as Elliott billionaire Paul Singer’s hedge fund accused him of financial underperformance, an “obsession” with image and wasteful spending on a Manhattan headquarters. For Kleinfeld, a member of President Donald Trump’s manufacturing council, today’s departure is the second time he has left a company under a cloud. In 2007, he stepped down as CEO of Siemens AG as the company worked to recover from a bribery scandal.
On Nov. 1, Arconic launched as a global provider of multimaterial manufactured products after its separation from Alcoa Corp., which remains as a bauxite, alumina and aluminum company.
Arconic signed more than $450 million in long-term global agreements in January for its forged aluminum wheels over the past year with customers in the truck, trailer, bus and recreational vehicle segments — with its largest agreement involving truck maker Paccar Inc.
“It looks like the incident cited was the straw that broke the camel’s back,” said Justin Bergner, an analyst at Gabelli & Co. “Most investors probably thought that it was time for Klaus to begin to think about handing over the reins.”
Arconic rose 3.8% to $26.88 at 2:34 p.m. in New York after advancing as much as 9.8% for the biggest intraday gain since Feb. 1. That was the day after Elliott announced its campaign against Kleinfeld.
David Hess, a board member and former president of United Technologies Corp.’s Pratt & Whitney jet engines unit, has been appointed interim CEO, Arconic said in an April 17 statement. Lead director Patricia Russo will take over as interim board chair.
“Mr. Kleinfeld stepped down as Chair and CEO by mutual agreement after the Board learned that, without consultation with or authorization by the board, he had sent a letter directly to a senior officer of Elliott Management that the Board determined [he] showed poor judgment,” Arconic said in the statement. It didn’t disclose the contents of the letter.
Since late January, Elliott has sought to oust Kleinfeld, 59, and replace four directors at Arconic’s May 16 annual meeting. The fund says it owns 13.2% of the parts maker.
Arconic stressed that its decision to let Kleinfeld go wasn’t made in response to the proxy fight or Elliott’s criticisms of the company’s strategy, leadership or performance. Arconic was created last year when former parent Alcoa spun off its jet- and auto-parts operations into the new company. Since then, Elliott has been reducing its stake in the new Alcoa Corp. while expanding its holdings in Arconic, according to data compiled by Bloomberg News.
Arconic had previously defended Kleinfeld by pointing to his track record of diversifying the old Alcoa and undertaking last year’s separation into two companies. Arconic had said the Elliott campaign was more about asserting influence than bettering governance.
Still, the manufacturer has proposed board and by-law changes, saying it will seek approval to make all directors subject to annual elections, eliminate a super-majority vote and give eligible shareholders a proxy access mechanism to nominate candidates. It also plans to lower gross debt by $1 billion this year, increase its return on assets and swing from negative to positive free cash flow, according to a presentation in February.
During the week ended April 15, Arconic said it could face a potential $500 million liability should shareholders back Elliott’s four dissident directors under a change of control provision within a 2007 employee retirement trust. Elliott last week called it a “poison put designed to entrench management” that could have been eliminated.
In March, the company faced a governance dispute over a vote deal with shareholder Oak Hill Capital Management, which owns 2% of Arconic. Arconic ultimately waived a requirement that the private equity firm back it at the upcoming annual meeting. That change followed a call by Elliott for a probe into a settlement, related to Oak Hill’s 2014 acquisition of Firth Rixson Ltd., that Oak Hill would vote its shares in support of the company.
By electing to resign, Kleinfeld might have lost out on $11.2 million in severance and other benefits he’d be entitled to if the board had let him go without cause, according to a regulatory filing. The filing didn’t specify how a voluntary exit would impact the ex-CEO’s unvested equity awards, worth about $19.6 million as of Dec. 31.
Arconic had $12.4 billion in revenue last year and counts Airbus SE and Boeing Co. as its biggest customers. Arconic in turn is the biggest buyer of Alcoa’s metals, accounting for about 10% of Alcoa sales, according to data compiled by Bloomberg.
Kleinfeld attended the first meeting of Trump’s manufacturing council at the White House in January and missed the second.
At Siemens, Kleinfeld resigned after less than three years as CEO after a probe into whether some employees used slush funds to bribe customers. Siemens was forced to review more than 420 million euros ($565.5 million) of payments, and Chairman Heinrich von Pierer resigned.
