CEO Daily: Tuesday, 18th April

What was shaping up to be one of the year’s great battles between an activist investor—Paul Singer’s Elliott Management—and an established corporate CEO—Arconic (and formerly Alcoa) CEO Klaus Kleinfeld—took a strange turn yesterday when Kleinfeld resigned under pressure from his board because of a letter he wrote to a senior officer at Elliott.

Details of the letter haven’t been released. But the board said it showed “poor judgement” on Kleinfeld’s part, and Elliott described it as an “attempt to intimidate or extort a senior officer” of the firm.

I had lunch with Kleinfeld just a few weeks ago. At the time, he was girding for the battle, and felt an Elliott victory would hurt Arconic’s commitment to innovation in new materials. He seemed confident he had the support of both his board and his customers. Indeed, the company put together a web site that included strong testimonials from the CEOs of Airbus, Boeing, United Technologies and GE Aviation, all backing Kleinfeld and arguing he was committed to delivering innovation for their firms.

But Elliott has been harsh in its criticism of Kleinfeld’s leadership, attacking the company’s high overhead costs, its Park Avenue headquarters, and its costly marketing campaign. (You can see its latest attack video here.) It even went so far as lining up a replacement…Larry Lawson, most recently CEO of Spirit Aerosystems

The Arconic board is headed by Pat Russo—a veteran of corporate battles. She oversaw Lucent’s merger with Paris-based Alcatel, before being pushed out in the infighting between French and American leadership. She also served as lead director of Hewlett Packard, when activist pressure contributed to a decision to split the company in two.

Interestingly, the Arconic board insisted in its letter yesterday that Kleinfeld’s departure was “not made in response to the proxy fight or Elliott Management’s criticisms of the company’s strategy, leadership or performance, and is not in any way related to the financials or records of the company.” And it called on Elliott to back down. The hedge fund indicated it will continue the battle. Arconic stock rose 3%.

I received many responses to Friday’s item on the Harvard Business Review article arguing our capitalist system has become too tilted in favor of short-term shareholder returns—virtually all of the comments favoring the argument. The authors argued that it is up to the board of directors to protect a company’s long-term future. Arconic’s board now has that responsibility squarely in its lap.

More news below.

Top News

• Hail to the Sultan—from the Chief

President Donald Trump became the first western leader to congratulate his Turkish counterpart Recep Tayyip Erdogan on his victory in Sunday’s constitutional referendum, despite concerns voiced by both European leaders and the State Department. Trump’s call, which also discussed the situation in Syria, lasted 45 minutes, according to Turkish officials. International observer organizations backed by the U.S. said the vote, which granted nearly unchecked executive power to Erdogan, had been taken “on an unlevel playing field,” while one observer said up to 2.5 million votes may have been manipulated. FT, metered access

• Mnuchin Hints at Death of Border Tax

Treasury Secretary Steven Mnuchin gave the clearest hint yet that the administration is backing off its plans for a tax that would effectively tax imports and subsidize exports with the aim of reducing the U.S. trade deficit. In an interview with the Financial Times, Mnuchin said the tax, through which President Trump hoped to raise much of the funding for his infrastructure program, was just one of many elements being considered, although he added that it hadn’t “been taken off the table.” He admitted that the administration’s hope of getting tax reform through Congress before August was “highly aggressive to not realistic,” due to the delay in getting health care reform passed. FT, metered access

• Anbang’s Move for FGL Falls Through

Fidelity and Guaranty Life, the life insurer and annuity company, said its deal to be bought by Chinese insurer Anbang for $1.6 billion would lapse, after failing to get all the necessary regulatory approvals. Anbang's FGL acquisition bid had received clearance from the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes deals for potential national security concerns, but couldn’t get past some U.S. state regulators—seemingly on concerns about its secretive ownership structure. The news highlights how the opposition to Chinese outbound acquisitions comes from more directions than just worried currency guardians in Beijing. Reuters

• May Pushes for Snap U.K. Election

Theresa May caved in to the remorseless logic that she needs a direct mandate from U.K. voters to deliver Brexit. May said she’s scheduling a vote in parliament to allow a general election June 8, saying it was “the only way to guarantee certainty and stability for the years ahead.” The motion will need a two-thirds majority to pass – far more than currently enjoyed by the 17-seat majority her party, but one that she can reasonably hope for, given that the opposition Labour Party (currently in acute disarray under a its far-left leader Jeremy Corbyn) will want to avoid being accused of blocking the democratic process. Corbyn has said his party will support the motion. BBC

Around the Water Cooler

• Murder Video Almost Embarrasses Facebook

Facebook’s moderation of its social network came under the spotlight again after it took nearly two hours to remove what appeared to be a livestreamed video of a murder in Cleveland (and another one in which the perpetrator boasted about it). As with last week’s reports of its failure to take down pornographic and extremist content in a timely manner, the company said it needed to “do better” while shrugging off any suggestion of responsibility for the content. Fortune

• International Is the New Domestic for Netflix 

Netflix reported a slowdown in subscriber growth in the first quarter but made up for it with a bullish forecast for the current three months. Over two-thirds of the new subs in the January-March period came from overseas, highlighting the degree to which the domestic growth story that first established it as a stock market darling is largely played out, even though the rally in its shares continues unabated. It’s up 17% this year, and will likely test a new record high at opening this morning. In contrast to companies still in the growth phase, the company is impressively profitable: net income rose to $0.40 a share from $0.06 a year earlier. Fortune

• United Can Beat Wall Street, Too

United Continental has many problems right now, but at least it’s still delivering on what it promised Wall Street. Its first-quarter earnings report matched or exceeded expectations on most key metrics, including, most importantly, net income, which was 8% above forecasts on a per-share basis. Those figures obviously don’t include the impact of last week’s PR disaster over the forcible removal of a passenger. They do go some way to explaining why the market initially sided with CEO Oscar Munoz before the full impact of the fiasco was appreciated. Fortune

• A Problem Apple May Not Be Able to Put Its Finger On

Is Apple about to develop Samsungitis? An investment analyst report raised the possibility that the company may choose to drop a new feature central to the marketing of the iPhone 8, its optical fingerprint sensor. Pacific Crest Securities said the module provider for the optical fingerprint feature doesn’t have a firm order from the Cupertino-based company. The brokerage argued this could be due to trouble integrating the fingerprint sensor with the new display. IBD