The new year has been a rocky start for Peloton and Guess, as activist investors have taken a stand within each company. While circumstances surrounding the outcry differ greatly between Guess and Peloton, these events serve as a reminder that no board or CEO operates in a vacuum – companies must steadfastly deliver value to all stakeholders involved, from employees and investors to the community at large. 

Peloton: Activist investors call for CEO removal amid major execution errors

Peloton rose to become the direct-to-consumer darling of 2020, benefitting massively from gym closures, the world’s leap to remote work, and a sense of virtual community found among its millions of riders and instructors. While demand and consumer evangelists skyrocketed in the early days of the pandemic, 2021 and onward delivered a shakier version of revenue and shareholder returns. Blackwells Capital LLC, owner of just under 5% of Peloton shares, released a letter in January calling for the firing of Peloton CEO John Foley and a sale of the company. Blackwells cited a laundry list of costly CEO failures, ranging from disrupting the product roadmap, a confusing and constantly changing pricing strategy, the inability to forecast demand, lack of internal financial controls, and misleading investors over the need for additional capital – leading to a collective $40B loss in wealth for shareholders. Yikes! 

Guess: Activist investors demand firing of co-founders for sexual misconduct allegations

And now Guess, Inc.: Legion Partners, an investment firm that owns an approximately 2.5% stake in Guess issued a public letter in February demanding the removal of Guess co-founders, Paul and Maurice Marciano from the board, and Paul from his role as Chief Creative Officer. The two co-founders have been hit with repeat sexual conduct and assault claims (Paul for the misconduct and assault; Maurice for turning a blind eye). Legion stated legal risk, reputational harm, and a call for zero tolerance for executives when power is abused – and great concern that the board continues to justify the two co-founders’ seats on the Guess corporate board. 

Legion’s letter noted that: “The fact that the Board somehow still justifies it today – when investors, customers, regulators, and other stakeholders have repeatedly made clear there should be zero tolerance for executives who abuse their power to sexually exploit employees – is astonishing,” the letter said. Legion’s issues are not with the CEO, or how the company is run; which they appear to think is just fine. They worry that the moral, legal, and reputation risks will be too much for the brand’s future success.

Boards need to pay attention 

The days of a board being focused solely on the management of the CEO, compliance, and financials are gone. These two cases – whereby activist investors are calling for sweeping changes – demonstrate the need for a board to be much more involved in the business, maintaining a pulse on everything from culture, the product roadmap, and employee morale to pricing strategy, hiring, and manufacturing forecasts. 

While a board’s responsibilities traditionally lie within the three main committees (Audit, Nom/Gov, and Compensation), Peloton and Guess show that stakeholders have higher expectations. Stakeholders, possibly led (as we see here) by organized activist investors, expect the board to react to employee allegations of abuse; they expect the board to press when forecasts are not met; they expect the board to look beyond the power of brand hype to think about fundamental company performance. They’re looking for the board to actively participate, rather than just show up to the quarterly meetings. 

Traditionally, activist investors have a bad rap among CEOs and Boards as being solely focused on short-term financial gains and negatively disruptive to business as usual (which CEOs and their boards might think are “doing just fine”). Increasingly, though, a well-rounded activist approach is a meaningful role for all stakeholders – emphasizing that boards need to pay attention to the greater business because everyone else is. The public is watching; the community is watching; the press is watching; investors are watching. They’re watching with the expectation that each of them will receive value, whether in the form of a great brand relationship, economic contribution, optimal company performance, a positive career experience, taking a stand, or innovative thinking. And when these parties do not receive what they expect, they may make a call for change. And they may do it on a public stage, as was the case with Peloton and Guess and activist letters shared with the broader public. 

Where shareholder capitalism meets stakeholder capitalism

The case with Guess is particularly interesting as a study in how stakeholders and shareholders come together as one and the same. Let’s say that the allegations of co-founder misconduct and sexual assault are completely unfounded. The questions come down to: 

• Who is more important – Guess, the company, or the individual co-founders?
• Is any one person so valuable to a company that you can’t do without them? If so, then does that mean damage to their reputation is equally damaging to the business?
• Is it the board and company’s responsibility to defend the will of the co-founders, keeping them on the board and Paul in his leadership role, or is it to defend the brand of the company and the focus of the business by removing them?

Is it not the responsibility of the board to say to the Marciano brothers: “Look, innocent or not, there have been at least 11 cases brought against Paul (four in the last year) associated with abuse of his role within this company through sexual misconduct and assault. We wish you well, but as valuable as you may have been, it’s time for you to go. You need to stand on your own in working out your issues, and let the company move on.” 

In pondering this, consider that the stock price today is where it was in 2006 – 16 years ago. Yet, the cost to the company to defend Paul Marciano – legal fees, a lawsuit involving Guess’ insurance company that is suing to be relieved from responsibility associated with Paul and the company’s wrongdoing, the management of public image – is mounting in time, money, and distraction at all levels. A tough decision needs to be made, but it seems like a clear one, whether from the point of view of a stakeholder or a shareholder.

The Marciano brothers own 37% of the business. The only way to move beyond them is to vote them off the board and Paul out of his leadership role. But, with such strong ownership positions held by the co-founders, it would be hard to turn over and appoint a new board. 

But, the three female independent directors and the CEO could do this. Why haven’t they? Why is an activist investor stepping in to push public sentiment and force their hand?

A reminder to CEOs and boards: Be prepared 

While one of the board’s key responsibilities is to manage the CEO, investors and employees also have high expectations of a company – whether strong financial return or simply “do the right thing”.  

In many cases, activist investors may serve as the great catalyst for change. Board members and CEOs can learn to work with, and manage, activist investors rather than meet them with trepidation and fear. Athena has hosted several Salons for our members on how to strategically manage and work with activist investors. Senior executives can gain a deeper understanding of investor activism through Athena’s live and on-demand Salons (Athena members: catch the full Salon on taking an offensive approach to investors here). 

A few broad highlights:

• Activism is on the rise after a brief pause in the early stages of the global Covid-19 pandemic. From institutional investors finding their voice, SPACs becoming increasingly popular yet problematic, and ESG gaining more prominence than ever – experts expect to see an increase in activist campaigns.
• As companies try to understand their next steps as we stabilize post-Covid-19, activists will increasingly try to play a part in those discussions.
• Small activist investors are gaining stronger footholds in sparking big changes, by joining forces with larger institutional investors. Many are making the case for bold changes based on issues heavily related to ESG, such as the climate crisis.
• Companies can take a more offensive approach to activist investors by proactively thinking through their vulnerabilities, what an activist response might be, and then taking action to either reduce vulnerabilities or justify their current performance or strategy.

It’s still early in the year, and we’re just coming out of the largest Covid-19 wave yet. Change is on the horizon. As companies make (or don’t make) their next moves, as was the case with Peloton and Guess, stakeholders and activist investors are watching – with more leverage than ever before.