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Rite Aid shareholder: Let's not pop the champagne yetActivists tend to be 'thorn in the side' of management, but they keep midstate companies honest

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With a stock price above $8 and climbing, Rite Aid Corp. investors have reason to celebrate at this month's annual shareholders meeting.

For those who picked up shares at less than a quarter in 2009, the party days may have already begun.

Even the head of the East Pennsboro Township-based drugstore chain is talking about aggressive growth opportunities — no longer rescue — as the company posted its second straight year with positive net income, following five years of losses.

“Because of our continued positive momentum, we are now in a position to evolve our strategy from one that focuses on turning our company around to one that emphasizes growth,” CEO John Standley said in a May letter to investors.

Standley cited the expanded distribution relationship with McKesson Corp. and highlighted the company's plan to increase capital expenditures to $525 million in fiscal 2015 — up more than $100 million from last year — to grow its wellness store remodels and customer loyalty programs.

“In many ways, we feel as though we are beginning a new chapter here at Rite Aid,” Standley wrote.

That's fine, as long as edits can be made to that book and Rite Aid doesn't lose sight of what pulled it down to the basement, said activist shareholder Steve Krol, a perennial critic since 2008 of the chain's poor customer-service record.

Krol, who lives in south Florida, will be back in the midstate for the annual meeting. He has a proposal on the agenda that calls for an independent chairman — an item the board of directors has already rebuffed.

“This is not punishment to ask for an independent chairman,” said Krol, crediting the job Standley and other executives have done recently. “I'm here to resolve problems and protect my investment.”

Krol first bought into Rite Aid in 2000. He owns more than 250,000 shares.

Double or triple

A lack of effort by middle management to address store problems, including zoning issues in some parts of the country, has hurt Rite Aid in customer service and, ultimately, stronger performance, Krol said: “Whether it's because they are overworked or they supervise too many stores, I don't care.”

Rite Aid has nearly 4,600 stores in 31 states and the District of Columbia.

“I'd rather be at $8 per share than $1,” he added. “But that still doesn't tell me the company is being run properly. The extra effort has got to be made.”

Krol believes Rite Aid stock should be at least double, even triple, where it is today. The nation's No. 3 drugstore chain has the ability to be more nimble and could solve customer-service issues quicker than CVS Caremark Corp. and Walgreen Co., Krol said.

An independent chairman would provide a CEO check and could help Rite Aid avoid past mistakes, Krol said.

A historic accounting fraud scandal had the company on the ropes in 1999. Its 2007 acquisition of the Brooks and Eckerd chains, followed by the recession, was nearly the final blow.

“They snatched mediocrity from the jaws of defeat,” said Anthony Liuzzo, director of business programs for Wilkes University's Arizona campus.

Rite Aid has done a lot of things right over the past few years, but they've “got a long way to go,” he said.

“It's not a time to sit down and say, 'We've done it,'” he said.

More than half of the S&P 1500 companies have separate CEO and board chairman positions, according to Equilar, an executive compensation data firm.

Activist shareholders

When asked about how the company addresses active shareholders and their recommendations, Rite Aid officials declined an interview.

“I can tell you that we welcome all shareholders' opinions and take their comments into consideration,” spokeswoman Ashley Flower said.

Krol believes he will have some of the institutional investors on his side at the June 19 meeting. And even if the vote doesn't go his way, he said, he will propose it again next year.

Activist shareholders are important, business professors and legal experts said, because they keep an eye on board activity and call management out on perceived problems.

However, without a sizable stake in the company, it's hard to have influence. There is also a built-in level of mistrust, because many of these vocal shareholders don't have any other relationship with the company, they haven't owned the stock very long and most are not local, said Kenneth Rollins, an attorney with Rhoads & Sinon LLP in Harrisburg.

Corporate governance issues are typical, said Rollins, citing proposals to declassify boards and eliminate super-majority voting requirements. He has represented several regional financial institutions, advising them with respect to strategies for managing their more-active shareholders.

Customer service and distribution issues would be shareholder concerns that should get more attention at the executive management and board level, he said: “These are concerns about performance and how to make the company better.”

For smaller investors, gaining support from others with influence is going to be key, said Patrick Cusatis, associate professor of finance at Penn State Harrisburg.

“If it's something that makes sense, they are going to get limited traction on their own,” he said.

Splitting up the CEO and board chairman roles continues to gain support as corporate activism spreads, he added.

“The real issue is they have too much power,” Cusatis said. “Separate people means one more monitor.”

There should be a synergy between what shareholders and company executives want, but the two are not always directly in line, added Liuzzo. In fact, there is usually a lack of consistency, he said.

“Activist shareholders are always a thorn in the side of company management,” he said. “But it keeps companies honest and subjects them to greater scrutiny.”

Separate roles

Rite Aid’s board said in the company’s proxy statement that it’s not in the best interests of the company and shareholders to split the roles again.

Standley was named CEO in 2010 after returning to the company in 2008. He was named chairman in 2012.

The board cited a lead independent director and said non-management directors meet regularly in executive sessions to evaluate senior management and to discuss other topics.

Krol’s proposal was deemed “an unnecessary limitation on the board’s flexibility and would not strengthen the board’s independence or oversight functions.”

CVS and Walgreens have separate chairmen and CEOs.

Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at jasons@cpbj.com. Follow him on Twitter, @JScottJournal. Circle Jason Scott on .

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