Shareholder Proxy Proposal Shows More Ire Toward Dillard

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By Suzanne Kapner
Staff Reporter

The ever-cozy board of

Dillard Department Stores

(DDS) - Get Report

may soon be getting some outside visitors, if investors have their way.

A shareholder proposal that aims to add more independent directors to the company's board has finally made it into its proxy. Dillard, based in Little Rock, Ark., operates 255 department stores.

Submitted by the

National Electrical Benefit Fund

, the proposal requests that all directors elected by class A stockholders, one-third of the company's 15-person board, consist entirely of independent directors, according to the company's recent proxy filing. The proxy also includes a proposal to change the company's name to Dillard's. (You know, adding an apostrophe and "s.")

Since 99% of the company's class B stock is controlled by the Dillard family, institutional investors can only submit proposals voted upon by holders of class A shares.

That voting arrangement led the

Securities and Exchange Commission

to rule earlier this year that Dillard could omit from its proxy a similar proposal from the

Wisconsin Investment Board

that targeted directors elected with both classes of stock.

"Initially our proposal was like

Wisconsin's," says James Combs, a spokesman for the electrical pension fund. "But we changed ours to deal only with class A directors."

Neither the Wisconsin Investment Board nor Dillard returned repeated phone calls. But in the SEC documents, Dillard urges stockholders to vote against the proposal because all class A directors are nonmanagement.

Why the shareholder hubbub? Right now, only four of the company's 15 directors meet the

Council of Institutional Investors'

criteria for independence, namely, that they have no financial or personal ties to the company. Seven directors are current or former employees, while four others have performed financial or legal services for the company. The proxy did not indicate which of the 15 are voted upon by class A shareholders.

"Having someone who's friends with a CEO judge and monitor the CEO is like grading your own papers," says Anne Hansen, deputy director of the Council of Institutional Investors, a Washington pension fund group that added Dillard to its focus list last year. The list is circulated among the group's 103 members and encourages shareholder activism at underperforming companies.

For the past 12 months, Dillard has underperformed the

S&P 500

by 38 percentage points. The stock closed at 30 1/8 Monday.

The institutional agitation was forecast in a

March 13 story in

The Street

. However, other turnaround initiatives outlined in that story have been slower in coming. While the company admits to quicker markdowns of slow-moving merchandise, Dillard is sticking with its everyday-low-pricing strategy that some industry followers say turns off today's promotion-minded consumers.

"Everyday low pricing works well in areas where we can execute," James Freeman, the company's chief financial officer, said recently at a lunch in New York attended by industry analysts.

But that strategy has not helped boost Dillard's same-store sales, which have gained only 1% in the past two months. Freeman said the company had tried driving sales by increasing staffing. But that program only inflated costs. With profitability at older stores sagging, the company is relying on new units to recharge earnings. Freeman said the company will add 11 stores this year, five of which are already open.

The company did succeed in trimming $10 million in expenses last year when it merged seven management divisions into five, Freeman added.

Unfortunately, despite that initiative and the shareholder nudging, Dillard may be going the way of so many other Southern belles.