Behind Staid Steel, a Percolating Boardroom Drama

JANUARY 23, 2014, 11:59 AM  Comment

Behind Staid Steel, a Percolating Boardroom Drama


Updated, 12:57 p.m. | When Craig S. Shular, the chief executive of a small steel company called GrafTech International, retired on Tuesday, it looked like just another management changeover at a midmarket industrial company.

But behind the scenes, a complex corporate governance battle was playing out, pitting Mr. Shular and a clubby board of directors against an outsider who joined the board as part of an acquisition three years ago. And even though Mr. Shular’s departure as chief executive was effective immediately, the fight for control of the $1.5 billion company is not over yet.

The story of GrafTech, replete with accusations of mismanagement and suspicions of leaked confidential information, illustrates the complex dynamics when relations between directors and management turn sour. It also highlights the increased sensitivity inside the boardroom in an era of activist investors and insider trading.

The complications that have ensnared GrafTech began in 2010, when it acquired two companies controlled by Nathan Milikowsky, a small-time player in the big world of industrial steel. GrafTech paid about $850 million for the Carbide Graphite Group, which made a crucial piece of equipment for steel manufacturing called a graphite electrode, and Seadrift Coke, which made the raw material needed to produce the electrodes.

For Mr. Milikowsky, the deal was a windfall. In 2003, he had bought the assets of Carbide Graphite out of bankruptcy for about $6 million and turned the company around. In 2005, he acquired Seadrift Coke, allowing him to integrate an important supplier and ramp up revenue at both companies.

Cashing out to GrafTech made Mr. Milikowsky, his investors and dozens of his employees wealthy. And as part of the sale agreement, Mr. Milikowsky was guaranteed a seat on the GrafTech board as long as he and his associates held at least 12 million of the company’s shares.

Less than three years later, however, Mr. Milikowsky was pushed off the board — after management accused him of leaking material nonpublic information to a hedge fund — even though he still held 15 million shares.

Mr. Milikowsky maintains he was not the source of any leaks and that management and other directors ousted him because he was criticizing them and Mr. Shular as GrafTech’s share price plunged.

In recent weeks, Mr. Milikowsky was preparing to nominate a new slate of directors before the company’s annual meeting, setting up a showdown between an entrepreneur who contends he was improperly ousted and a company that says it is simply protecting itself.

But Mr. Shular’s abrupt resignation on Tuesday threw Mr. Milikowsky’s plans into disarray.

In stepping down, Mr. Shular said he made “the personal decision to retire from day-to-day management in order to spend more time with my family.” He will stay on through the year as executive chairman.

Mr. Milikowsky’s camp, however, says it believes Mr. Shular may have retired to avoid a public fight. This month, Mr. Milikowsky signaled he was on the verge of taking his nominees to GrafTech’s shareholders.

Whether Mr. Milikowsky proceeds with his plan to nominate new directors remains to be seen. On Wednesday, he applauded the resignation of Mr. Shular and called the promotion of Joel L. Hawthorne to chief executive “a good first step in the fundamental turnaround that is necessary to save the company and increase shareholder value.” But Mr. Milikowsky maintains that he deserves to be a director, and he vowed to continue to fight for a seat on the board.

Neither side expected the dispute when Mr. Milikowsky joined the GrafTech board in 2010. He was respected in the steel industry and initially on good terms with Mr. Shular and his fellow directors.

After Mr. Milikowsky spent a year on the board, however, his opinion of management and his fellow board members plunged. He thought the company was underperforming, spending too much on overhead and making poor strategic choices.

“This has been my only public company experience, and I was amazed,” he said in a recent interview. “The C.E.O. knew something about graphite electrodes, but the rest of the directors don’t know anything about the business.”

Some of his discontent can be chalked up to an entrepreneur’s discomfort with outsiders managing a business he built, and GrafTech did underperform its peers. But the last few years were going to be rough for GrafTech regardless of management choices as demand for its products waned in the wake of the financial crisis. Since Mr. Milikowsky joined the board, GrafTech shares have fallen 40 percent.

“I wouldn’t say it’s primarily on management why they’ve had poor performance,” said Michael Gambardella, a JPMorgan Chase analyst who covers GrafTech. “It’s the market.”

Nonetheless, Mr. Milikowsky said the company should have been doing better. “By late 2011, I had come to a distressing preliminary conclusion: Things aren’t as rosy as people say they are,” he said. “We’re turning down orders that we should be taking. So we’re losing market share. The inventory is ballooning.”

In early 2012, Mr. Milikowsky began meeting with other directors to make his case. At least one was openly supportive, he said, and another was sympathetic to his concerns but wary of confronting management without a majority of board members aligned.

Yet before Mr. Milikowsky’s campaign could gain traction, inquiries from a hedge fund, Samlyn Capital, put the company on edge. The hedge fund, which had been a passive investor in GrafTech for years, began asking pointed questions in May 2012 about the company’s operations.

Correspondence reviewed by The New York Times indicated that management and other directors believed that Samlyn appeared to have confidential information about the company, including details that were known only by a small circle of insiders, including the board. GrafTech management was worried that there could be insider trading in the stock, or that Samlyn could be using the information to make its case for change. And to Mr. Shular and some members of the board, Samlyn’s criticisms of the company sounded uncannily like those presented by Mr. Milikowsky.

The correspondence did not cite any specific examples of GrafTech insiders giving the hedge fund information. Samlyn, which no longer holds any GrafTech stock, has not been accused of any wrongdoing. Samlyn declined to comment.

Undaunted, Mr. Milikowsky pressed to replace Mr. Shular in a letter addressed to GrafTech’s lead director, Mary B. Cranston, a retired chairman of the big law firm Pillsbury Winthrop Shaw Pittman, who is also a director at Visa.

But by late 2012, Ms. Cranston and others inside the company had become convinced that Mr. Milikowsky was the source of the leaks. Samlyn had contacted Mr. Milikowsky’s brother, Daniel, who is also a GrafTech shareholder. And despite Mr. Milikowsky’s denials, he was pinned as the culprit.

GrafTech contends it referred the matter to the Securities and Exchange Commission. Meanwhile, it granted Mr. Shular whistle-blower status, protecting him from any related litigation. The S.E.C. appears never to have pursued the matter.

“They dreamed up this whistle-blower nonsense as a total sham excuse to protect Shular, and they dreamed up this leak as an excuse to force me off the board,” Mr. Milikowsky said.

At last year’s annual meeting, Mr. Milikowsky was not nominated for re-election and was subsequently removed from the board.

Since then, he has been working with law firms to make his case to the company that he was improperly ousted. Stephen Fraidin, a top lawyer at Kirkland & Ellis, took on his cause last year, adding legal firepower to the dispute.

But GrafTech has not budged so far. In letters to Mr. Milikowsky’s lawyers, GrafTech contends that Mr. Milikowsky violated the company’s corporate governance guidelines and did not return confidential information after his board service ended.

The company declined to answer questions about Mr. Milikowsky or the board.

After nearly a year away from the company, Mr. Milikowsky concedes he may never return to the board and expressed disillusionment about his experience as a director.

“It really gets to the heart of American capitalism,” he said. “You have this amazing business, and then you have management playing these games. If all public companies are like this, that is horrifying to me.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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