Ralph Whitworth is the Founding Principal of Relational Investors who founded the hedge fund in 1996. Over the years the hedge fund has been put under the spotlight many times due t the activist approach adopted by Whitworth. Relation Investors has gained high publicity due to its attack on companies like Home Depot, Occidental Petroleum, Genzyme, and ITT.

Whitworth started Relational Investors with the aims of investing in undervalued companies by buying large shares of the company and aggressively shaking up its internal management and operations to realize the company’s true potential.

Relational Investors is an employee-owned investment management firm with Ralph Whitworth and David Batchelder being the two largest investors of the company. CalPERS was Relational Investors’ first large investor and is currently still one of the biggest backers today. The CalPERS-Relational ties established in March 1996. The company has $1.5 billion still invested in Relational Investors.

The firm caters to non-pooled investment limited partnership as well as state and municipal government entities, and individuals with high net worth. The company has a closely knit management team, some of whom have been working together since 1985.

Whitworth focuses Relational Investors’ investments in U.S public equity markets primarily focusing on mid cap and large cap companies which seem to be traded at good value. The firm currently has over $6 billion of capital. It charges 1% management fee along with a 20% incentive fee on beating the market. Relational Investors compares its equity portfolio performance with S&P 500 Total Return Index as benchmark.

The prominent members of Relational Investors apart from Ralph Whitworth include David Batchelder, the co-founder of the firm who joined in 1998, Lisa Cain, Jagdish Sitlani, and John Sullivan.

Investment Philosophy:

Relational Investors is widely known as an activist firm which invests in poorly managed or structured but financially healthy companies with public equity market capitalization of more than $2 billion. The firm is known to purchase a 5% to 10% stake in companies of interest in order to implement its stewardship principles to improve management and strategic direction. Board composition, corporate governance, capital structure, and company strategies are some issues which is aggressively addressed by Whitworth after investing in the company.

Whitworth initially invests approximately $100 million in the company of interest and then submits a request of audience to the management and directors of the company along with few proposals on increasing shareholder value. If the company is accepting of the proposal, Relational purchases 5% to 10% stake in the company. If the company declines the offer, Whitworth is known to threaten the company with plans of holding a proxy fights while going public with the proposal.

Relational Investors has a portfolio which is diversified with companies of different sectors such as healthcare, services, technology, and basic materials. However, the firm has large portion of its portfolio invested in specific companies namely Genzyme Corp., CVS Caremark Corp., Occidental Petroleum Corp., Intuit Inc., Home Depot Inc., Spdr S&P 500 Elf Trust, and Unum Group. The top 5 holdings of Relational Investors make up 51.56% of the firm portfolio.

Manager Biography:

Ralph Whitworth is known for his expertise in the field of corporate governance. His extensive career background is clear evidence of the fact that he is good at what he does. He graduated from Georgetown University Law Center with a Juris Doctor degree. From 1981 till 1984, he Whitworth was a member of the U.S Senate Judiciary Committee of Senator Paul Laxalt. Following that, in 1985, he became Assistant to General Partner at Mesa Limited Partnership. At the time, Mesa was regarded as the largest independent oil and gas company of U.S. Till 1988, Whitworth managed the executive staff, actively participated in the financing and investing activities, and served as a member of the company’s operating committee.

In 1989 till 1992, Whitworth was the President of Development at United Thermal Corporation. Similar to Mesa, United Thermal was the largest company in its industry of district heating and cooling system. He was on the company’s board of directors and chaired a special committee which represented minority shareholders during sale transaction. He resigned in 1993. Alongside, during the period of 1986 till 1994, Whitworth served as the President of United Shareholders Association.

One of the most significant illustrations of Whitworth’s competency can be his tenure as the Chairman at Waste Management and Apria. From 1998 till 2004, Whitworth served as the Chairman of Waste Management. During 1999, the company underwent major managerial changes in the midst of an accounting scandal. He conducted a bottom-up financial analysis and dominantly brought about changes in the Waste Management’s managerial team. Not only that, he was in charge of the management of the entire company. His efforts paid off in 2002, when Waste Management was recognized by BusinessWeek as one of the five ‘Most Improved Boards’.

Similarly, Whitworth was recognized for his works as a Chairman at Apria Healthcare Group from 1998 till 2005. BusinessWeek in 2000 and 2002 declared Apria’s board as one of the ten ‘Best Boards in America’. The Institutional Shareholder services named Apria as the ‘Best Governed Company in North America’ in 2000. Moreover, Corporate Directors Forum declared Whitworth the ‘Director of the Year’ in 2004 for his tenure at Apria. Apria also gained high recognition during Whitworth’s time as Chairman as The Corporate Governance Advisor published an article titled ‘Apria’s Designer Board May Be Model for Next Millennium’ in 1998.

Whitworth has not only served on boards of Waste Management and Apria Healthcare Group, but 8 other public companies as well. These include Mattel Inc., Sirius satellite Radio Inc., Tektronix Inc., Sprint Nextel Corporation, Wilshire Technologies Inc., United Thermal Corporation, Sovereign Bancorp, and Genzyme Corporation. During his tenure as a board member, 6 of the 10 companies ended up in Fortune 500. It was during the financially challenging times of 2007 and 2008 that Whitworth became the Chairman of Sovereign Bancorp’s Credit and Risk and its Capital Committee.

Ralph Whitworth is an activist hedge fund manager who initially starts with an investment of $100 million to purchase a small stake in the company. He then makes a request of audience to the management and the directors of the company while presenting a proposal to increase the company’s shareholder value. If accepted by the company managers and directors, Whitworth invests enough to make up 5% to 10% of the equity. However, in case of rejection from the company, Whitworth usually starts a proxy battle and acts on the threat of going public with the proposal.

Many companies have fallen prey to his aggressive style of activist investing which include big names such as ITT, Genzyme, Occidental Petroleum, and Home Depot. Relational Investors has come into spotlight for publically indulging in uncompromising change in these companies’ management or strategic direction. In 2006, Whitworth started an effort to eliminate Home Depot’s business of commercial building supplies. Eventually, the then CEO of Home Depot, Robert Nardelli, resigned as the company agreed to devise an alternative to replace the building supply business of Home Depot.

In 2010, Relational along with CalPERS publically argued against the ridiculously high pay levels of Occidental Petroleum’s CEO, Ray Irani. Whitworth threatened to boot off members of the board who approved the $857 million pay of Ray Irani over the period of past 10 years. Ray Irani left Occidental while the company brought about changes to its compensation system to maintain a reasonable executive pay which was more relavant to the company’s return to stockholders.

Relational Investors has the largest position in Genzyme followed by Carl Icahn. In 2010, Whitworth made public about Genzyme’s manufacturing and regulatory problems along with its high spending on acquisitions. After Whitworth won the proxy battle with Carl Icahn, Genzyme sold itself to Sanofi-Aventis. Sanofi Agreed to take over Genzyme for $20.1 billion.

More recently, Whitworth threatened to boot out the board of ITT for its expansive business. In order to avoid the messy fight with Whitworth, the company in January 2011 announced it had plans of breaking up the company since six months and thus, would implement it. Despite their disagreement with the fact that it was not as a result of investor pressure, most believe the plan to break up ITT was due to Whitworth.

Whitworth’s active participation in companies’ managerial and strategic problems in order to fully realize the value of the company is justified with the reason being that he invests enough to earn himself the right to do so. Genzyme Corp, Occidental Petroleum, and Home Depot make up 5 of his top holdings. Even though Relational Investors hold stocks of diverse companies belonging to various sectors of the economy such as Technology, Healthcare, Basic Materials, Services and Financial, the major chuck of the portfolio is invested in the top 5 holdings.

The top 5 stocks make up 51.56% of Whitworth’s portfolio. As of March 31^st 2011, Genzyme Corp makes up 13.01%, CVS Caremark Corp, makes up 11.15%, Occidental Petroleum makes up 10.33%, Intuit Inc makes up 10.21%, and Home Depot makes up 6.86% of the Relational Investors’ portfolio. Relational has the largest position in Home Depot, Genzyme, and Intuit, while it has the second largest positions in CVS Caremark and Occidental Petroleum.

In the first quarter ended 31^st March 2011, Relational Investors added Electronic Arts Inc to its portfolio. He purchased 4.9 million shares of EA worth $95,779, making up 1.54% of Relational’s portfolio. In May 2011, Electronic Arts announced that it had reached mutual cooperation agreement with Relational Investors which gives the hedge fund the option of appointing Whitworth to EA’s board. It also provides Whitworth the opportunity to be re-nominated for a one-year term by EA in 2012 at its annual meeting.

One of Relational Investors’ recent investment misstep could be the decrease of National Semiconductor Corp by 64% as of March 31^st 2011. Initially, he purchased National Semiconductor after a proxy fight in 2003. He purchased 13 million shares of the company and acquired access to its management and board. In 2007, it had more than 12% of the company with 44 million shares. However, since 2009, he had been aggressively selling off National Semiconductor stocks. As of first quarter 2011, Relational had 7.4 million shares of the company. Much to Relational’s disappointment, in April 2011, Texas Instruments announced the purchase of National Semiconductor at $25 per share. Prior to the purchase, National Semiconductor stocks had been traded at an average price of $14.50 during the first three months of 2011.

Quotes:

“We see ourselves as stewards of our clients’ shareholdings. Proper stewardship requires active engagement of corporate leadership to spur improved performance.”

“I really haven’t seen any situations, even with the most aggressive smaller hedge funds, where they have put their interest ahead of the other shareholders.”

“I’m a fan of director evaluation. On one board I served on, we did it with a questionnaire that each board member completed on all the other board members. Everyone received their own results and the Nominating Committee received a summary. It really causes people to reflect on their high and low scores. Human nature kicks in and things change. This process led to a number of open and candid discussions on that board.”

“Retirement ages and term limits are both vehicles to try to refresh board composition but unfortunately, retirement ages too often delay the more difficult decisions and function as default flushing mechanisms which enable “dead wood” to sit around the board table until they reach the retirement age. Boards must become much more pro-active about managing director performance.”

“Sovereign’s board members have repeatedly breached trust with the very shareholders they were elected to represent. These directors must be removed as promptly as possible.”