Sleep Number’s largest shareholder says current board isn’t up to choosing a new CEO

Sleep Number’s largest shareholder says the company’s current board should not be choosing a new CEO.

Current Chief Executive Shelly Ibach announced in October she would retire before the next annual meeting.

The shareholder, Stadium Capital Management, said in a letter published Monday the next step should be revamping the board, not looking for a new CEO, and urged other shareholders to join its activist effort.

Investors responded, raising Sleep Number’s share price 18.9% on Monday. It was down 6% in early trading on Tuesday.

Ibach has been president and CEO of Sleep Number since June 2012, and chair since 2022. The board said it had hired an independent firm to conduct a search for Ibach’s successor.

Sleep Number also announced that its lead independent director, Michael Harrison, would be named chair of Sleep Number; that two of its longer serving board members would retire by the 2026 annual meeting; and that it would declassify its board by changing the three-year board terms.

“While on the surface these changes represent forward progress, it is clear to us that they are the bare minimum, insufficient and wholly inadequate given the gravity and urgency of the situation Sleep Number finds itself in today — thanks to this board,” Stadium Capital wrote in its letter.

In discussions with the board, Stadium Capital said it believed Ibach would be heavily involved in the succession planning and that the search firm chosen had worked with Ibach and the board on previous management and board member hires.

While ultimately it is the board’s decision, outgoing CEOs can have an impact on succession plans. Sleep Number said that Ibach will do informational interviews only and will not be selecting which candidates move forward in the process. As chair, she’ll have one of the 11 votes at the end of the process on the new CEO.

Peter Keith, senior research analyst at Piper Sandler who has been covering Sleep Number for 13 years, published an investor note Monday agreeing with Stadium Capital’s assertions.

“We believe SNBR shares could have significant upside potential with a break from the past, by bringing in a new CEO that can improve culture, execution, capital allocation, and communication with the Street,” Keith wrote.

In September 2023, Connecticut-based Stadium Capital went public with its displeasure over the long-term performance and governance of Sleep Number and requested that it name new members to Sleep Number’s entrenched board of directors. The parties eventually signed a cooperation agreement and two of Stadium Capital’s nominees were added to the Sleep Number board.

Sleep Number’s annual sales, profits and store count increased under Ibach as the company positioned itself as a premium product by embracing the connection with better sleep on its adjustable smart bed mattresses to overall wellness.

However, Stadium Capital pointed to the stock’s relative underperformance particularly to rival Tempur Sealy International both short-term and long-term.

Since Ibach’s announcement, Stadium Capital said it has tried to work with the Sleep Number board to improve the search process for her replacement and is now urging other shareholders to share their displeasure with the board.

“We believe that corporate governance improvements and shareholder-driven reform can make a big difference,” said Stadium Capital in its letter.

In a statement issued later Monday, Sleep Number acknowledged that it had been meeting with Stadium Capital on its succession planning. It also said it invited Stadium Capital to meet with the succession committee and the independent search firm Korn Ferry but that Stadium Capital had withdrawn its participation.

“While we openly welcome input into the process from Stadium and other shareholders ... we will not deviate from the approach our expert advisors have recommended because Stadium demands to have outsized influence,” Sleep Number wrote in response to Stadium Capital’s letter.