Southwest Airlines Makes Concessions to Thwart Proxy War

Southwest Airlines has long cherished its reputation for doing air travel differently than other major characters. Among its most famous quirks, Southwest has been known for its open-seating policy. Loved by some travelers and reviled by others, passengers board Southwest planes by lining up in numbered order to claim available chairs on the plane.

When Southwest announced earlier this year that it was putting an end to open seating, the news caught some loyal flyers by surprise. Meanwhile, at least one activist investor celebrated.

Following the threat of a proxy battle with Elliott Investment Management L.P., one of the biggest activist hedge funds in the world and one of Southwest’s largest shareholders, Southwest on October 24 announced a series of big moves. They included implementing the changes to the carrier’s boarding processes and premium seating options. Moreover, the airline agreed to a plan that would shake up its board of directors while retaining long-time CEO Bob Jordan.

Elliott presented a proposal to Southwest in September to overhaul the board, update boarding policies, and oust Jordan and executive chairman Gary Kelly. The dispute caused months of contentious negotiations and a threat from Elliott to call a shareholder meeting in December to allow investors to vote on board candidates. In addition to changing its seating policies, Southwest ultimately agreed to add five Elliott-backed nominees to the board and move Kelly’s retirement date up several months.

The new directors joined the Southwest board on November 1. They include former Virgin America CEO David Cush; a former administrator at the Federal Railroad Administration, Sarah Feinberg; former Marriott International Group President Dave Grissen; former WestJet CEO Gregg Saretsky; former Chevron Corp. CFO Pierre Breber; and Patricia Watson, the chief information and technology officer at NCR Atleos.

Despite the bitter and very public battle, both Southwest and Elliott got something out of the deal. For months, Elliott had called for changes to the board and the ouster of both Kelly and Jordan, charging them with being responsible for Southwest’s poor performance. However, the airline managed to keep Jordan in place. And because the agreement thwarted what could have been a distracting and time-consuming proxy war, Southwest will have the bandwidth to focus on Jordan’s “transformational plan” to turn the airline around.

On the flip side, Elliott sent a message to companies everywhere. Keith Gottfried, CEO of shareholder activism defense firm Gottfried Shareholder Advisory, told Reuters that the agreement “reinforces their ability to get things done at large companies.” Gottfried added that Elliott’s power play put Jordan on the hook to deliver results from his turnaround strategy.

In the meantime, activist peers of Elliott are making moves of their own. For instance, Jana Partners has its sights set on potato products company Lamb Weston after playing a key role in its spinoff a decade ago. Additionally, Engine Capital is angling to put six new directors on the board of Dye & Durham in an effort to boost the Canadian software maker’s valuation. At industrial gas company Air Products and Chemicals, hedge fund D.E. Shaw has pushed for three new additions to the board of directors. There was also the expensive dispute earlier this year between agitator Nelson Peltz of Trian Fund Management and the Walt Disney Company earlier this year.

And who can blame antsy activist investors for testing the limits at corporations right now? If Southwest is willing to kill off its signature cattle-call boarding process, maybe anything is possible.