Caving under pressure from the activist investors Carl Icahn and Mark H. Rachesky, Navistar International Corp. (NAV) recently strengthened the supervision of its senior managers by replacing three board members. But the truck and engine maker still has more work to do on its corporate governance.
The former CEO Daniel C. Ustian and his team struggled against headwinds in recent years ranging from the economic crisis to production failures. As Navistar’s stock price sank in the past year, Mr. Icahn has been upping his investment stake and pushing for change. On Sept. 11 he threatened that if Navistar didn’t shake up its uncooperative board of directors, he would “engage in the tiresome and expensive process of protracted litigation and a proxy fight.”
Navistar announced on Oct. 8 that it appointed Icahn’s staffer Vincent J. Intrieri and Dr. Rachesky to its board, and would also add a third director mutually agreed upon by Icahn and Rachesky. The new directors will stand for election at the company’s 2013 annual shareholders meeting. They replace Eugenio Clariond and Steven J. Klinger, who have agreed to retire. Also, David D. Harrison gave notice of his request to retire from the board on Oct. 5.
The departing directors were never ideal for Navistar in the first place. Clariond, the former CEO of the Mexican diversified industrial Grupo IMSA, has served on Navistar’s board since 2002; while experience has its merits, long familiarity with management can interfere with a director’s ability to supervise objectively. Moreover, Clariond also served as director of Grupo Financiero Banorte S.A., Mexichem S.A., the Mexico Fund Inc. and Johnson Controls Inc. while acting as chairman of the Mexican Fund for Nature Conservancy and president of the USA-Mexico Business Council. Given his many responsibilities, Clariond seems unlikely to have had enough time to pay his full attention to Navistar.
Harrison, who is a managing partner of the real estate investment firm HCI Inc. also seems "overboarded." He served not only on Navistar's board but also as a director of the oil well drilling equipment maker National Oilwell Varco Inc. and a director of the fibre cement technology firm James Hardie.
Meanwhile Klinger has been president and COO of Smurfit-Stone Container Corporation since 2006 and a director at the paper-based packaging company since December 2008. Given that Smurfit-Stone Container Corporation filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code on Jan. 26, 2009, his credentials for steering companies toward profitability leave more to be desired.
Since the former CEO Ustian and his team experienced problems restating their financial results, as we discussed in our article, almost any kind of management shake-up is likely to be positive for such a company. Navistar’s recently appointed new directors will add fresher, more objective faces to its board. Lewis B. Campbell, who has been board chairman and interim CEO at Navistar as of Aug. 26, is also an outsider who can potentially instigate needed cultural changes, as he had formerly been chairman and CEO of the industrial company Textron Inc.
That said, problems remain for Navistar. Icahn had protested in September that Campbell had "zero experience" in the heavy truck industry and watched Textron stock go from over $37 per share to $20 per share over an 11 year period, primarily because of a risky financial subsidiary which lent money to a golf course and time share project.
The recently elected directors are also open to the criticism of being overboarded. Intrieri, who has been employed by entities related to Icahn since October 1998 in various investment related capacities, is the chairman of CVR Energy Inc., board member of both Federal-Mogul Corporation and Chesapeake Energy Corp., and board chairman and director of PSC Metals Inc. Meanwhile Rachesky, who founded the investment firm MHR Fund Management LLC, is board chairman of Lions Gate Entertainment Corp., Loral Space & Communications Inc., Telesat Holdings Inc., Emisphere Technologies Inc. and Leap Wireless International Inc.
More significantly, four shareholders hold almost 60% of Navistar's stock as of September, including Icahn with his nearly 15% stake. So far this dynamic has helped contribute to some positive changes for minority investors, but Icahn’s interests won’t necessarily align with theirs in every case and he now has significant powers over the company.
Other problems with Navistar’s corporate governance remain unresolved. For example, three other people on Navistar’s 10-person board besides Clariond have served for at least a decade. These include Michael N. Hammes, who chairs both the finance and nominating & governance committees along with being the board’s lead director, the audit committee chair James Keyes, and the compensation committee chair John D. Correnti.
Clearly, Navistar isn’t out of the woods yet, but at least Icahn has succeeded in pushing the company down a different path.