Neuberger Berman’s behind-the-scenes campaign to shake up Whole Foods is the latest example of a dynamic that is upending relations between public companies and the big investors that own their stock.
For decades, Neuberger Berman — which invests some $267 billion for pension funds, sovereign wealth funds and individuals — and peers like T. Rowe Price and BlackRock were reluctant to rock the boat at the companies they invested in. Agitating for change was left to the activist hedge fund managers like Mr. Icahn and Mr. Ackman, rabble-rousers with a reputation for shaking up companies, raising their stock prices and making big profits.
But these two worlds are increasingly colliding in showdowns at companies including Dell, Microsoft and now Whole Foods, a reflection of the shifting balance of power on Wall Street.
Traditional money managers in search of market-beating returns are demanding a seat at the table, turning to activists for help and even employing some hedge fund tricks of their own. And activists, once the black sheep of the investment world, are now accepted as regular, if meddlesome, investors.
Do companies “really listen to the feedback they get from their mainstream investors?” said Michelle Edkins, global head of corporate governance at BlackRock. “I think they are certainly making an effort to listen more.”
But activists, she added, “can act as an important ‘check and balance’ on management that has lost its way.”
Before Neuberger Berman approached the activists, it talked to Whole Foods representatives and made its case for change. While the company undertook some reforms — for one, scrapping its dual-chief-executive structure in November — the conversations yielded little effect on the company’s dwindling share price.
So Neuberger Berman executives prepared an inch-thick presentation, the kind of document usually produced by activists. It took broad aim at Whole Foods, criticizing everything from its cozy board and wilting produce to its pricey real estate in well-heeled neighborhoods like Columbus Circle, where Whole Foods has a store in the Time Warner Center — one of the most expensive retail spaces in New York City. With that in hand, they approached several hedge funds, including Starboard Value and Elliott Management.
Before long, Jana was amassing shares of Whole Foods. On April 10, as it unveiled its stake in the company, it ticked off a list of complaints that echoed Neuberger Berman’s concerns: The brand was suffering, customer service was lagging and the company needed fresh blood on the board.
Jana declined to comment.
Neuberger Berman declined to comment about its interactions with hedge funds regarding Whole Foods, but said the firm was willing to take a more active role in certain situations. “We have engaged with the company quite aggressively over the course of the last period of time,” said Joseph Amato, president and chief investment officer of Neuberger Berman, referring to Whole Foods.
Relations between institutional investors and activists have evolved in recent years, and it is not unheard-of for big investors to support activists who have set their sights on a high-profile company. In 2013, T. Rowe Price teamed up with Mr. Icahn to oppose a leveraged buyout of Dell.
Southeastern Asset Management, another institutional investor, worked with Mr. Icahn on another offer to buy Dell, and also supported an effort by Barington Capital Group, a hedge fund, to shake up the retailer Dillard’s. And ValueAct Capital, a hedge fund that focuses on technology investments, took a stake in Microsoft knowing it had the support of other big shareholders, ultimately winning a seat on the board.
Neuberger Berman has taken a more confrontational approach before. Last year it campaigned for change at another company in which it had invested, the technology company Ultratech. It secured two board seats, but the process, Mr. Amato said, was “in all honesty expensive and time-consuming.”
In the case of Whole Foods, Neuberger Berman lobbied for the activists to do the messy work of battling the company in public.
At the same time, activists, and Jana in particular, have grown more comfortable working with institutional investors. Before Jana went public in 2012 with its fight against Agrium, the Canadian fertilizer company, it met with other shareholders and sought their support. And the year before, when Jana was pressuring the publisher McGraw-Hill to spin off part of its business, it did so with the support of the Ontario Teachers’ Pension Plan.
But it is less common for an institutional investor to share its work on a specific target with activists in the way Neuberger Berman did with Whole Foods. Mr. Ackman has described receiving occasional calls from institutional investors hoping to pique his interest in a company. There is even a term for the interplay: “R.F.A.s” or “requests for activism.”
For many large shareholders, the 2008 financial crisis was the turning point that led to greater collaboration with activists. Investors watched as the value of their stock portfolios plummeted.
They began to ask whether a company’s board and its executives were doing enough to fix their business. Sometimes talking to an executive was not enough to prompt change, and the prospect of working with an activist did not seem so outlandish.
At the same time, activists, who at times could be brash, have softened their images. Third Point’s Daniel S. Loeb — once famous for the verbal invective that he lobbed at chief executives — has opted more recently for the quiet approach of complimenting executives but emphasizing “undervalued” aspects of their businesses. In a letter to investors two years ago he sought to dispel the notion that activists were “hit and run” investors.
“It might surprise people to hear that we completely agree that the sort of activism they describe is abominable,” he wrote.
That’s not to say the activists are always right. In 2015, Mr. Ackman made a big bet on Valeant Pharmaceuticals International. But the company was hit by regulatory and political scrutiny in the past year over its drug pricing and its relationship to a mail-order pharmacy, and its stock took a beating. Last month, Mr. Ackman sold his firm’s entire stake in Valeant, resulting in a $4 billion loss, and apologized for what he called a “huge mistake.”
In the case of Whole Foods, Jana has focused on a broad range of issues with the business — which has gained the name “Whole Paycheck” for its expensive products. It pointed to failures in how Whole Foods handled its brand development, and to what it said were customer service deficiencies and a poor strategy for distribution.
Once the vanguard of the natural and organic food movement, Whole Foods now faces competition from big-name grocers like Safeway and Costco that have started to offer similar organic products, at lower prices.
As its share price slid last year, Whole Foods cut its prices, offered promotions and started a loyalty program. After Jana’s announcement, the company said it was “committed to driving value for all Whole Foods Market shareholders and will continue to act to achieve this important objective.”
But analysts have speculated the company could be a takeover target, which would result in a big payday for Jana, Neuberger Berman and other investors. A flurry of reports of takeover interest — the supermarket chain Albertsons and Amazon, the e-commerce giant, are reported to have explored bids — has helped to lift the share price.
Charles Kantor, who oversees Neuberger Berman’s investment in Whole Foods, said that the company had “a phenomenal brand and had executed the difficult things,” but that “they haven’t done well with the basic Retail 101.”
Mr. Kantor said it was normal for his group to speak with other investors. But, he added, “We’ve never made an investment predicated on an activist showing up.”