UPDATED: Investor Group Questions Dillard's Commitment to Shareholders

by Lance Turner  on Thursday, Aug. 30, 2007 3:39 pm  

James Mitarotonda, a co-founder and principal of Barington Capital Group, as seen in an article from the Wall Street Reporter here.

Equally disturbing is the Company's majority voting standard, which the Company implemented in response to a shareholder proposal aimed to strengthen the Company's corporate governance, but did so in a manner that had exactly the opposite effect. According to the Company's 2005 Proxy Statement, the Board implemented a by-law amendment to change the Company's plurality voting standard for director elections to a majority voting standard in response to a shareholder proposal the Company received from the United Brotherhood of Carpenters and Joiners of America Pension Fund. The Company's by-laws now require nominees for directors of each class to receive the affirmative vote of a majority of shares of the class outstanding in order to be elected.

Majority voting proposals like the one made by the United Brotherhood of Carpenters, which seek to replace the plurality voting system whereby directors only need a single vote to be elected in an uncontested election, have received significant support from stockholders over the past few years. It is typical, however, for a public company that moves to a majority voting standard to provide in its by-laws for the plurality standard to remain in effect in the event of a contested election. Such a provision, however, was excluded from the by-law amendment that the Company's current Board passed in May 2005. As a result, in a contested election where stockholders clearly favor a director from an alternative slate that has not received a majority of the votes (such as in the case where an alternative director receives the support of 49% of the shares outstanding and the incumbent director only receives the support of 20% of the shares outstanding), the incumbent would nevertheless remain in office because the alternative director did not receive enough votes to be deemed "elected" under the Company's by-laws.

This by-law amendment serves as a mechanism to disenfranchise stockholders and entrench directors, because if no nominee receives the support of a majority of the stockholders, the incumbent director would remain in office beyond his or her one-year term, even if the alternative director received the support of a majority of the votes cast in the election. Combined with the Company A/B class structure, the Company's "poison pill" rights plan that the Board adopted in 2002 without stockholder approval and the Company's other protective measures, Dillard's has successfully erected (with the cooperation of its Board) a host of anti-takeover defenses that limit the ability of the Company's public stockholders to influence both the Company they own and the Board of Directors that is supposed to be representing their interests.

In light of the foregoing, we seriously question the Company's commitment to the interests of its public stockholders. This concern has been expressed by others, including Morningstar in its July 12, 2007 Analyst Report, which states

"[T]he board is controlled by insiders, leaving little room for checks and
balances. We have our doubts as to whether management operates in the
interest of the firm's other shareholders, and we believe that overall
stewardship is very poor." (6)

While we strongly believe in the potential prospects of Dillard's, the status quo is clearly unacceptable and has been destroying shareholder value. It is time for you to cause the Company to make the changes necessary to improve the Company's financial performance and corporate governance. As stockholders of the Company, it is our expectation that each of you will fulfill your fiduciary duties to all of the Company's stockholders, regardless of how you were elected to the Board.


/s/ James A. Mitarotonda

James A. Mitarotonda

(1) See, e.g., the July 15, 2007 research report of UBS Securities ("The Dillard family does not openly communicate with investors . DDS has not had a conference call since 2003, does not publicize their reporting dates, and does not host headquarter visits with investors.").

(2) L. Kroll, "Bargain Bin," Forbes (Sept. 18, 2000). The article describes the Dillard family as "an insular, stubborn, clan" that "now seems less interested in boosting shareholder value than in retaining control." The article also quotes Thomas Jackson, a managing director of Prudential Investment Corp., which at the time was the Company's second-largest stockholder, as stating "Shareholders have written letters but get no response. They are arrogant and impervious to outside input." See also A. Daniels, "Whose Minding the Store?" Arkansas Democrat-Gazette (Nov. 2, 2003) (quoting an A.G. Edwards analyst as stating "They're a private company masquerading as a public company.").

(3) Calculation includes salary, bonus, the realized value of exercised stock options, the present value of accumulated pension benefits and disclosed "other compensation," and does not include the value of unexercised option grants.

(4) See G. Warren, "Five Stocks that Deserve an F," Morningstar (July 27, 2007) ("[T]his firm certainly has perfected the art of enriching family members through the control that their ownership of the company has afforded them."). See also Proxy Governance, Inc.'s report for the Company's 2007 Annual Meeting ("We have concerns regarding the company's executive compensation, in particular that paid to the 'other named executives,' which is high compared to peers and given the company's poor financial performance relative to peers.").

(5) See Institutional Shareholder Services' Corporate Governance Quotient (CGQ) profile reports.

(6) See also the June 28, 2007 analyst report of Credit Suisse ("The question remains whether management and outside investors' interests are aligned. We do not think so, and we are unwilling to judge these shares in any way except for the current operating fundamentals which remain poor.").



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