Barnes & Noble storeThe proxy contest between Barnes & Noble (BKS) founder, chairman and top shareholder Leonard Riggio and billionaire Ron Burkle, the company's second-largest stockholder, keeps tightening its grip on the publishing industry. Poison pills, lawsuits and the prospect of a sale that might take the company private have only added grist to the narrative mill. Now, thanks to a surprise recommendation from the largest proxy governance firm, Institutional Shareholder Services (ISS), the run-up to what's certain to be a contentious annual shareholders' meeting on Sept. 28 just got a great deal more interesting.

Releasing its report on Monday, ISS recommended that B&N shareholders vote for the three board of director nominees proposed by Burkle and his company, Yucaipa Cos., instead of the three directors put forward by B&N. Among Burkle's group is Burkle himself, and among Riggio's group is, of course, Riggio himself.

ISS took issue with the close ties between Riggio and the company's board and the precipitous stock slide of nearly 29% over the course of the year. But it was particularly critical of the same deal that Burkle has blasted throughout his acrimonious and litigious battle: Riggio's selling off BN College to its parent company for $439 million in cash.

A "Compelling Case" for Change

Interestingly, ISS did not take issue with the close ties between Burkle and his slate of nominees, which includes former KB Home CEO Stephen Bollenbach, on whose board Burkle served for more than a decade.

Said ISS in a summary: "Based on BKS' deteriorating operating performance, poor shareholder return, less-than-enthusiastic analyst recommendations, inadequate transparency into and disclosure on a very large related-party transaction which appears to have exacerbated performance problems [i.e. the purchase of Barnes & Noble College], and significant concerns about unusual pay practices, we believe the dissidents have demonstrated a compelling case that change in the BKS board is warranted."

Barnes & Noble issued a statement saying it was "astounded" by ISS's recommendation.

As The New York Times pointed out, ISS's recommendation is particularly crucial because "many large institutional investors are required to vote their shares along the lines of ISS's recommendations." But it could also sow confusion among investors who were paying attention to prior guidance from other key proxy governance firms that went very much the other way.

In its recommendation, proxy advisory company Glass Lewis sided with B&N's slate, arguing that Yucaipa did not have a concrete plan for moving the bookseller more definitively into the digital age and to circumvent overall declines in sales and profits. The same line of reasoning also informed proxy adviser Egan-Jones's recommendation last Friday against Burkle and for B&N. A spokesperson for Yucaipa did not respond to requests for comment.

Personal Stakes and High Emotions

With two proxy advisers siding with B&N and another backing Burkle, it scuppers any fleeting thought that investors would be guided by unanimous recommendations. Indeed, the proxy firms' split more accurately mirrors the deep divide between the Riggio and Burkle camps, each of which represents approximately one-third of total company shares. That leaves the remaining 33% of shareholders to look to their chosen proxy firm for guidance, mandatory or otherwise, on how to vote.

Then again, the Sept. 28 vote may have less to do with how B&N should function in the future and a lot more to do with personal stakes and high emotions. The level of discourse between both sides in letters, statements and dispatches has the whiff of an elementary school playground at recess. Riggio, in comments to The New York Times last week, said he "[finds] it almost repulsive I have to be put in a position to defend myself. . . . I don't want to consume myself with not liking people."

Up to 20 firms have signed nondisclosure agreements with respect to a possible sale of B&N, with preliminary offers expected as soon as October. Yucaipa, however, isn't one of those parties. Burkle told the Times that "such documents typically contain onerous restrictions for potential bidders."

Which leads us to an unlikely, but perhaps karmically appropriate recommendation: vote for Barnes & Noble's slate of directors, but instead of B&N nominee David Golden, place Ron Burkle on the board. Then the battling billionaires will either sink or swim together, depending on how they choose: to get along or stay at odds.

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