This story has been updated to include contents of a letter to the board from company founder William Pulte late Monday and a letter from the board to shareholders issued Tuesday morning.
The tenure of Richard J. Dugas as CEO of PulteGroup Inc. (NYSE:PHM) will end at the company's May 2017 shareholders meeting after an unusual maneuver by company founder Bill Pulte, his grandson and an independent director "demanded an immediate CEO change and a different direction for the company," according to the company. It is unusual for a publicly traded company to include such direct language in an official statement.
Shares of PulteGroup dropped immediately after the announcement Monday morning and were trading down nearly 10% at $16.65 in heavier-than-usual late morning trading amid a less steep selloff across the home building sector.
Dugas, who joined Pulte in 1994, became CEO in July, 2003 and took on the additional title of chairman in August of 2009. He guided the company through the housing crash, its acquisition of Centex Homes, which made Pulte a top-three home builder. The company said it had formed a committee of independent directors to work with an executive recruitment firm to search for a successor, which it added could include internal as well as external candidates.
The statement said, "Mr. Dugas' decision to retire is due in part to the actions of Bill Pulte, who founded the Company in 1950, Mr. Pulte's grandson, and Jim Grosfeld, who was appointed to the Board in December at the behest of Mr. Pulte. These individuals recently demanded an immediate CEO change and a different direction for the Company. In an effort to avoid a contested public battle that would not be in the interests of shareholders, Mr. Dugas offered to accelerate and make public the Board's succession plan, prompting today's announcement."
Under Dugas, the company swung from a $310 million loss in 2011 to an $816 million profit in 2015. It also cut its debt-to-capital ratio during that time from 60% to 30%.
The company expanded the board to 11 members in December, 2015. It was at that time that Grosfeld joined the board.
The company statement lauded Dugas, whom it said "also positioned PulteGroup to succeed in the future" in part by establishing "a strong team, including the recently promoted Ryan Marshall as President and Harmon Smith as Chief Operating Officer."
"Under Richard's direction and with the implementation of the Company's Value Creation strategy, PulteGroup has made tremendous progress in generating significantly higher profitability and strong shareholder returns by strengthening the Company's balance sheet, improving its fundamental operations and more effectively allocating capital," said James J. Postl, the Lead Independent Director. "The Board thanks Richard for his outstanding leadership and appreciates his willingness to suggest this path and see the Company through this important stage of its strategic plan. We also appreciate that Richard has provided ample time to conduct a formal, comprehensive search for his successor."
Attempts to reach a company spokesperson for further comment via telephone and email were unsuccessful.
esterday, as the culmination of a month-long dust-up that positions the venerable Bill Pulte and his grandson Bill Pulte's interests--and, they assert, the interests of most shareholders--Bill Pulte submitted this letter to the board of directors of the PulteGroup:
April 4, 2016
The Board of Directors
3350 Peachtree Road NE, Suite 150
Atlanta, Georgia 30326
Ladies and Gentlemen:
As the founder, former Chairman and CEO, and largest shareholder of PulteGroup, Inc., I am writing in light of the company’s public announcements this morning to reiterate my extreme disappointment in the leadership of CEO Richard Dugas and the lack of performance of PulteGroup under his watch.
I told Richard early on in his tenure that I intended to allow him to own and drive PulteGroup’s operations and strategy and not to insert myself into the day-to-day operations of the company. Unfortunately, Richard Dugas’ lack of performance and repeated bad decision-making has led me to conclude that the company needs new leadership.
Accordingly, I recently approached Richard Dugas and the Board and conveyed my disappointment in Richard Dugas’ leadership and the need for an immediate change. Based on ensuing discussions I had with members of the Board, I understood that the Board was seriously considering my concerns, and I hoped that they would take steps to implement a near-term change for the benefit of PulteGroup shareholders.
This morning, however, I learned that PulteGroup announced that Richard Dugas had informed the Board of his intention to retire over a year from now. This falls far short of the short-term leadership change that PulteGroup shareholders and PulteGroup employees need.
In addition, the company also disclosed this morning in its definitive proxy statement for the 2016 annual shareholder meeting that the Board had determined not to nominate James Grosfeld to continue as a director of PulteGroup “for a number of reasons, including as a result of differing points of view between Mr. Grosfeld and the other independent directors over succession planning and other business strategy matters.” The company had previously disclosed in its preliminary proxy statement for the 2016 annual shareholder meeting that Mr. Grosfeld was a nominee. The Board’s decision not to renominate Mr. Grosfeld reflects an attempt to stifle any differing views on management and business strategy matters, which is contrary to good corporate governance. Jim Grosfeld is highly regarded as one of the best homebuilding executives and homebuilding financial experts in the history of the U.S. homebuilding industry.
Specific examples of the leadership failures of Richard Dugas and the inadequate performance of PulteGroup under his watch include, but are not limited to, the following:
- Since Richard Dugas was appointed CEO almost 13 years ago, PulteGroup’s stock price has not appreciated significantly, even when many peers have performed strongly since the Great Recession.
- Richard Dugas laid off key and irreplaceable homebuilding talent that have left the Company.
- After many years of losses at PulteGroup, Richard Dugas moved the Company’s headquarters from suburban Detroit to Atlanta, which cost the shareholders tens of millions of dollars with no apparent benefit to shareholders. It is important to note that PulteGroup had become the largest homebuilder in the United States while headquartered in Michigan.
The shareholders and employees of PulteGroup deserve a strong and growing company, especially in today’s highly competitive and growing environment. The necessary management changes are long overdue, and the succession plan announced by the Board only serves to further delay these changes to the detriment of shareholders. PulteGroup has great assets and many loyal and talented employees, whose potential is waiting to be realized with effective leadership. This is not about going backward; this is about going forward with the right CEO and the right strategies.
Accordingly, I am asking the Board to significantly accelerate the announced succession plan for Richard Dugas, and recruit an experienced and seasoned homebuilding operator as CEO, one who truly understands the homebuilding business.
I stand ready to assist in identifying such a person and enabling a bright future for PulteGroup and my fellow shareholders.
Pulte Homes (PHM:NYSE)
On Tuesday morning, the board released the following letter to shareholders:
Dear PulteGroup Shareholders:
You may have seen the letter to our Board of Directors that was recently made public by Bill Pulte, who founded PulteGroup in 1950, stepped down as Chairman in August 2009, and currently owns 8.87% of PulteGroup stock. In his letter, he made various allegations and attacks against the Company, its management and its strategy. We wanted to provide our shareholders with the facts relating to recent actions by Mr. Pulte, his grandson and one of our directors, Jim Grosfeld, in their attempt to influence our considered succession planning process and change the strategic direction of PulteGroup. While we have significant respect for Mr. Pulte as the founder of PulteGroup, we believe his campaign is misguided and is not in the best interests of shareholders.
In addition, we want to reassure our shareholders that the Board stands firmly behind the Company's Value Creation strategy, which has produced significantly higher profitability and shareholder returns since Richard Dugas, our CEO, and his team began implementing it in 2011. We also are strongly supportive of our CEO as he continues to execute that plan over the coming year, and as he assists us in the process of identifying the next generation of leadership to continue the Value Creation plan.
Actions Leading to the Decision Not to Nominate Mr. Grosfeld as a Director at the May 2016 Annual Meeting of Shareholders
We have a strong, independent and diverse board, including top real estate expertise, financial expertise and real business leadership. The Board is engaged and challenges management in a thoughtful, open-minded way in service to all of the shareholders of the Company.
We added Mr. Grosfeld as a director effective December 2015, at the suggestion of Mr. Pulte. The Board's decision not to nominate him as a Director at the May 2016 annual meeting reflects his participation in a number of actions over the past several weeks that we believe are inconsistent with acceptable norms of corporate governance and without due regard for the interests of ALL shareholders. These actions include:
A demand for Mr. Dugas' resignation. On March 21, 2016, Mr. Dugas was summoned by Mr. Pulte to a meeting. To Mr. Dugas' surprise, Mr. Pulte's grandson and Mr. Grosfeld were also at the meeting, where:
They made various critiques of the Company's performance and strategy.
They criticized the Company's decision to relocate its headquarters to Atlanta.
They stated they had identified Richard's successor, but would not reveal the individual's name.
Mr. Pulte demanded that Mr. Dugas agree within 10 days that he would be retiring in the near-term – or "there would be war".
Attempting to circumvent the Board's governance processes by failing to report to the Board. Mr. Grosfeld never notified the Board about the meeting, or what was discussed at the meeting, before or after it occurred.
Unwillingness to help the Company unless his personal demands were met. Following the meeting on March 21, Mr. Dugas promptly debriefed the other independent directors about the situation, and the independent directors caucused and decided to reach out to Mr. Grosfeld to try to arrange a meeting to open a dialogue with Mr. Grosfeld and the Pultes to better understand their concerns and assertions. The independent directors asked Mr. Grosfeld to help arrange and participate in that follow-up meeting with Mr. Pulte, however, he initially refused to do so unless he received assurances that he would be nominated to the Board.
Taking action only when he was informed that he was not acting appropriately. It was not until after we reminded Mr. Grosfeld of his fiduciary duties as a director that he agreed to assist the independent directors in arranging a follow-up meeting with the Pultes.
The Pulte/Grosfeld demands relating to Board leadership. At the follow-up meeting with two of PulteGroup's independent directors, the Pulte/Grosfeld group ratcheted up their demands:
Reiterating their call for Mr. Dugas' resignation, this time requiring that the resignation be announced in seven days and be effective by the end of May 2016.
Demanding that Mr. Grosfeld be nominated for election as a director at the 2016 annual meeting of shareholders.
Demanding that the Chairman role be shifted to another member of the Board.
Asserting that the Board add two Pulte/Grosfeld selections as new directors.
This is unacceptable behavior for a sitting Board member. The fact that Mr. Grosfeld did not discuss his participation in a meeting of this nature, nor his plan with the Pultes, with any of his fellow directors – until the independent directors reached out to him – is inexcusable. Mr. Pulte's statements, made at the meeting with our two independent directors, that he had been having serious issues with Mr. Dugas' leadership "for two and a half to three years" and that he was particularly upset about the relocation of the Company's headquarters in 2013 are strong evidence that he and Mr. Grosfeld had undisclosed motives behind their efforts to have Mr. Grosfeld added to the Board last December.
For these and other reasons, the Board unanimously (other than Mr. Grosfeld) decided not to nominate Mr. Grosfeld to the Board.
In connection with these events, Mr. Dugas attempted to defuse the situation by offering to accelerate and make public his retirement plans. Before the demands and threats by Mr. Pulte (supported by Mr. Grosfeld), Mr. Dugas had shared with the Board his preliminary thinking about retiring sometime in the next couple of years and had begun to set the stage for an orderly succession with some well-considered promotions of individuals who would have the potential to follow him.
The recent Pulte/Grosfeld attacks have been targeted at Mr. Dugas, and in particular seem to revolve around their unhappiness that the headquarters was moved from Detroit, Michigan to Atlanta, Georgia while Mr. Dugas was CEO – a decision spearheaded by the Board. The Board not only thanks Mr. Dugas for his outstanding leadership, but the magnanimity he has displayed in offering to accelerate and make public his decision to retire, in the spirit of avoiding a costly, contested public battle with the Pultes that would risk destroying value for shareholders.
We truly appreciate Mr. Dugas' willingness to suggest this path and see the Company through this important stage of its strategic plan. In particular, the ample time he has given the special committee of independent directors to conduct a formal, comprehensive internal and external search for his successor will help to ensure we are able to select an outstanding candidate as our next CEO.
The Recent Attacks by the Pultes
Given Mr. Dugas' attempt to provide the path for a constructive resolution, it is disappointing that the Pultes have decided to publicly play out their personal vendetta against him, and attempt to hijack the Board's succession planning.
Their attacks simply do not square with the facts:
Under Mr. Dugas' leadership, PulteGroup's Value Creation strategy was launched in 2011 after a comprehensive review of value drivers in homebuilding, including extensive interviews with investors. Value Creation, which is focused on delivering improved financial performance through the housing cycle by maintaining robust homebuilding gross margin, driving greater overhead leverage, increasing asset efficiency, and disciplined capital allocation, including the return of capital to shareholders – has delivered significant benefits to shareholders, as demonstrated in the following charts.
Photo - http://photos.prnewswire.com/prnh/20160405/351526
Mr. Dugas has also positioned PulteGroup to succeed in the future. We expect 2016 to be an important inflection point in the execution of this strategy, as prior investments and operational improvements drive continued earnings growth. We strongly believe the Value Creation strategy is the right path forward, and that this team is positioned to execute it successfully.
The Company has made tremendous gains under its Value Creation strategy and we look forward to the ongoing progress we expect to realize in 2016 and beyond. We thank you for the input that you have provided, as well as your continued support of the management team and Board of Directors.
James J. Postl
Lead Independent Director
for the Board of Directors