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'I'm All Ears': The Secret to Trian's Success With Corporate Boards

James Langford

In the two years since Trian Partners became Pentair's largest single shareholder, much has changed for the London-based manufacturer.

In August, the company sold a valves and controls business that was hard hit by slumping oil prices to Emerson Electric Co.  for $3.2 billion. Last month, Pentair decided to split its largest businesses, electrical and water products, into two separate companies.

One constant through all the changes has been the company's CEO, Randall J. Hogan. Not only did he keep his job -- which is by no means a given when a large investor decides to take an active role in a corporation -- he collaborated on the company's strategic changes with New York-based Trian and the director it selected.

That's the method Trian prefers, one that CIO Ed Garden says is far more likely to yield a win for all parties than tactics such as starting proxy fights, engaging in barrages of public criticism and firing top managers.

The private-equity firm normally seeks only one board seat at the companies it invests in because "we have confidence that if we have the right plan, if we can quantify that, if we can be thoughtful and realistic and can articulate that well, then the power of the argument will win," Garden explained at "Corporate Governance: Navigating New Challenges to Value Creation," an event sponsored by The Deal and BoardEx, business units of TheStreet.

"If I can't convince 12 or 13 other people of my point of view, then maybe I should listen to why there's an objection," he added. "I always say to the other board members, 'I'm willing to change my mind. If there are reasons we shouldn't be doing this, I'm all ears.'"

That attitude, Pentair's CEO explained in a discussion moderated by TheStreet's Jim Cramer, is part of the reason Trian's relationship with his company clicked. When Pentair learned in 2015 that an outside investor had taken a large stake in the business, executives didn't know at first who it was.

Then an intermediary, who happened to be a longtime friend, called Hogan and introduced him to Garden. "That's an example of what's different about the way our relationship started," Hogan said, "and why I think it turned out so well, because of the respect Trian and Ed [Garden] showed us."

Since Trian went public with its stake, Pentair has climbed 1.4% to $65.36. Today, the private equity firm's holding is valued at about $1 billion, and it's second only to Vanguard's in size.

While it's sometimes difficult for executives who have led a company for years to be open-minded about an outsider's strategy, Garden said that wasn't the case with Hogan.

Why? "One of the things I've learned in 17 years as CEO is that in business, success has many parents and CEOS should be comfortable with that; if there's failure, it's the CEO," Hogan said. "So as the CEO, you should be open to whatever could be right."

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Trian, of course, has encountered more hostile reactions from some of the companies in which it has invested. In 2015, founding partner Nelson Peltz engaged in what was only the second proxy fight in the firm's history with DuPont Co. , losing to then-CEO Ellen Kullman, who stepped down shortly afterward.

Her successor, Ed Breen -- who had previously split manufacturing giant Tyco International into a total of six separate companies -- went on to work with Trian on a merger with Dow Chemical that's tentatively slated for completion later this year.

Once completed, the combined company -- which was originally expected to have a market value of $130 billion -- will split into smaller businesses.

It's a plan not dissimilar to Pentair's breakup, which will create a water business -- which includes filtration and environmental systems -- with $2.8 billion in sales, and an electrical company with $2.1 billion in revenue. Hogan plans to retire as CEO and chairman of Pentair when the split-up is completed and will take the role of chair at the electrical firm.

"It's human nature as CEO to want to get bigger; it's in a way counter-intuitive when you're CEO to get smaller, but that was never an issue" with Hogan, said Trian's Garden. "He was very focused on, 'How do we make each of these businesses most successful long-term?'"

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