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DuPont CEO Ellen Kullman Photograph by Jason Alden — Bloomberg via Getty Images

DuPont’s victory: A big win for Ellen Kullman, but activist investors aren’t finished

May 13, 2015

DuPont, the almost 213-year-old chemical giant, won its right to remain intact, at least for now. And in the process, it dealt a blow to the growing wave of shareholder activism driven by hedge funds, which have recently become more successful at forcing companies to meet their demands.

The victory for DuPont (dd) came at the hands of one of the most prominent and successful activists, billionaire hedge fund manager Nelson Peltz.

On Wednesday morning, at DuPont's annual meeting, shareholders voted to re-elect all of the company's board members, ending a four-month, bruising proxy battle with Peltz. The investor's fund, Trian Partners, sought to get four nominees elected to the chemical company's board, including Peltz. Trian argues that DuPont is weighed down by excess costs and would be better off broken up, though the fund backed off that stance during the proxy fight.

At Wednesday's shareholder meeting, in a scene that looked like it was out of the 1987 movie Wall Street, Peltz took the microphone, standing in the aisle of a packed auditorium in the main building of DuPont's Wilmington, Delaware suburban campus. Peltz, whose Trian owns 2.7% of DuPont's shares, said that he thought his involvement with the company had pressed it to do better, and that, regardless of the outcome of the vote, he was going to continue to apply pressure. "We have a record of making companies better and better for the long-term," Peltz told the crowd. "We have a lot pride in DuPont and, like all of you, we want DuPont to return to greatness."

About 20 minutes later, DuPont announced it had prevailed in the board vote. About half the room stood to give DuPont's CEO Ellen Kullman a standing ovation. "We know there is more to do," Kullman said. "But we think the company and this board has chosen the right path and we look forward to continuing."

Despite the defeat, Peltz and other shareholder activists are likely to keep up the fight. Speaking after the meeting, Peltz said the DuPont defeat was unlikely to stop him from launching similar proxy fights with other large companies, if he thought it was necessary. Peltz also said that he received overwhelming support from active mutual funds and institutional shareholders. He said DuPont won because of its support from individuals and index funds, who Peltz implied were less informed about the company.

And Peltz predicted the company would disappoint shareholders again this year. "We think they are going to miss their 2015 targets as well," he said.

The investor did not directly say whether he planned to continue to hold DuPont's stock or whether Trian would sell its stake.

Several observers have said that the DuPont fight was evidence that shareholder activism had gone too far, and that it was threatening innovation and long-term thinking at large companies. Warren Buffett, at Berkshire Hathaway's recent shareholder meeting, said he thought activists were pushing companies to use corporate cash for share buybacks that didn't make a lot of sense.

Even with the loss, Peltz said that his brand of shareholder activism works. And he has a good argument. Peltz purchased shares in the company two years ago and started pushing for changes behind the scenes. Since that time, DuPont has made a lot of changes, including announcing a spin-off of its cyclical chemical businesses, setting a goal to cut $1.3 billion in annual costs and buying back $5 billion in shares. The moves have been well received by shareholders.

CEO Kullman has said those changes were not driven by Peltz, but it's hard even for her to know what would have happened if Peltz hadn't come along. Peltz took credit for DuPont's recent moves on Wednesday. "We're not the enemy. The stock is up 50% since we got involved with it," he told me. "But you'll find a way to turn that around and say we made it go down 50%." Peltz was referring to a Fortune article published earlier this week that was critical of Trian's analysis of DuPont.

The DuPont proxy battle was fought on both sides through a flurry of documents sent to shareholders and filed with the SEC, and through online and newspaper advertisements. Peltz made a number of appearances on CNBC. And Trian launched a Twitter account devoted to the fight. On Wednesday, Peltz estimated that Trian spent $8 million on the proxy contest, and that he believed DuPont spent $20 million.

At times, the battle got personal. Trian highlighted stock sales made by DuPont CEO Kullman, saying they signaled she no longer had faith in the company. DuPont questioned Trian's investment track record, and regularly pointed out that the only other investment the hedge fund had made in the chemical industry had resulted in a bankruptcy.

Future proxy fights will likely be even nastier. Peltz said he thought that DuPont had done a better job of shaping public perception of the fight and that he would fight harder next time to get his message out. "They used scare tactics and painted us as raiders," he said. "We're not raiders."

The victory means that Kullman gets to continue her plan for DuPont. Kullman's job was never directly in jeopardy. Even Peltz's proposed director slate included Kullman as a board member. But at times, Trian did seem to want to make the board fight a referendum on Kullman's performance.

Kullman argued that she is in the process of transforming DuPont into a more profitable company. But at least part of her moves seem to stem from the fact that she took over the company in 2009, when many of DuPont's most economically sensitive businesses were tanking. She has sought to move the company out of its most cyclical businesses, even if they are profitable. And that had hurt the company's bottom line.

In a series of interviews before the vote, Kullman offered Fortune a behind-the-scenes look at her near two-year-long battle with activist Peltz. Kullman said she came from a long line of "tough-as-nails women." Her dad would threaten to make her shoot free throws in the snow if she missed in a game. Richard Goodmanson, a former chief operating officer of DuPont and for a time Kullman's boss, calls Kullman intensely competitive, in "sports and everything else." "Ellen is a very strong leader in almost every dimension," says Goodmanson.

When Kullman ran DuPont's safety division, Matt Trerotola, who worked for her, said she was known as the toughest gatekeeper in the company. "If you got Ellen's okay on a project, you knew it would get approved," says Trerotola. He says she regularly made him and others defend his projects, and rank them in order or priority, and potential revenue.

Trerotola, who left DuPont a few years ago but returned last year to run the safety division, says Kullman has instituted her tough approval system throughout the entire company.

For DuPont, the proxy battle win means the company will stay mostly intact, for now. Next month, DuPont will go ahead with its planned spin-off of Chemours, a specialty chemical unit. DuPont's earnings have been flat over the past few years. Kullman has argued profits have been dragged down by the cyclical nature of Chemours' earnings, which peaked in 2011. Shareholders, not including Peltz, have largely given DuPont a pass because of that. But after the spin-off DuPont is likely to be under more pressure to make it's earnings targets. And the multinational company will continue to face headwinds from a slow-growing global economy and a strong dollar, which has hurt DuPont's sales overseas and made them less profitable.

Some shareholders are skeptical of DuPont's prospects. Shares of DuPont were down 6% at midday on Wednesday following the shareholder meeting. And if DuPont doesn't deliver, Peltz implied he would be back to fight again. Shareholder activism at the company is certainly not dead yet.

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