April 9, 2013 / 1:27 AM / 6 years ago

J.C. Penney board comes under fire for CEO switch

(Reuters) - The board of J.C. Penney Co Inc is facing scathing criticism from retail investors and corporate governance experts after ousting Chief Executive Ron Johnson and replacing him with his own embattled predecessor, Myron Ullman.

J.C. Penney Chief Executive Ron Johnson testifies in New York state Supreme Court in Manhattan March 1, 2013. REUTERS/Thomas Iannaccone/Pool

Hours after the switch was announced on Monday, there was at least one call for the entire board to resign, while others suggested shareholders might vote out current board members at the company’s next annual meeting.

“It was the wrong thing for the board to do to get rid of Johnson here. With the board firing Johnson now, at this stage in the game, they should tender their own resignation as well,” said Brian McGough, managing director and head of the retail group at Hedgeye Risk Management.

Though the board may not face serious legal challenges to the decision, shareholders may question whether its move to replace Johnson with Ullman, who Johnson himself replaced in late 2011, is good for them.

J.C. Penney shares lost half their value during Johnson’s tenure after having shed 15 percent during Ullman’s time as CEO from 2004 to 2011. The stock price plunged further Monday night on the news of Ullman’s return, as analysts blamed him for creating the problems that Johnson was supposed to fix.

Whether Ullman is the right man for the job or not, some said ultimate responsibility for the company’s future now lies with the remaining 10 members of the board of directors, four of whom joined in the last five years.

The board said in a statement it picked Ullman because he was well-positioned to move quickly and improve sales, but Ullman himself conceded in an interview that the change was so new he did not yet have a plan.

Governance experts said it was unlikely the board would face legal repercussions for the change.

“That’s a classic board decision,” said Charles Elson, a professor of finance at the University of Delaware. “It’s called business judgment. It’s up to them.”

J.C. Penney Chairman Tom Engibous, in a statement, said the company felt fortunate to have Ullman’s help. The board, through a company spokeswoman, declined further comment.


Board member Bill Ackman, the hedge fund manager whose Pershing Square is J.C. Penney’s largest shareholder, might also take heat for his role in the CEO debacle.

Ackman handpicked Johnson to replace Ullman and in May 2012 said the company had been “chronically mismanaged” during his tenure. Ackman could not be reached for comment, but said last Friday that criticism of Johnson “is deserved.”

David Tawil, whose hedge fund Maglan Capital had bet that J.C. Penney’s stock would fall further, likened the change in management to an abrupt about-face.

“This is like Elon Musk announcing that Tesla (the maker of electric cars) is changing gears and will now focus on gas-powered vehicles,” Tawil said.

Whether the board get to make the same mistakes again will be entirely up to shareholders, said Paul Hodgson, an independent corporate governance analyst in Camden, Maine.

“When you get a board that keeps making errors like that, then you start to lose faith not just in the CEO, but in the board as well,” said Hodgson. “I think at the next annual meeting, the shareholders will be registering their dissatisfaction with the board.”

Additional reporting by Karen Freifeld and Phil Wahba in New York, Svea Herbst-Bayliss in Boston, Jessica Wohl in Chicago and Lisa Baertlein in Los Angeles; Writing by Ben Berkowitz; Editing by Edward Tobin, Mary Milliken and Matt Driskill

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