As J.C. Penney Flounders, a Lack of Control Becomes Evident The latest events at J. C. Penney provide a hard lesson: With today's public company, it is sometimes difficult to be sure who is in control. Take the messy way that the struggling retailer raised capital last week. CNBC and others reported that J. C. Penney's chief executive, Myron E. Ullman, told an investor breakfast on Wednesday that he didn't see "conditions for the rest of the year that would warrant raising liquidity." The company denies that Mr. Ullman made the comments. Those conditions apparently didn't last long. On Thursday, J. C. Penney announced the sale of as many as 96 million shares with Goldman Sachs as sole book runner. This is a staggering number of shares, equivalent to about 43 percent of J. C. Penney's existing share capital. Faced with such a dilution, the share price of J. C. Penney plunged 13 percent. Despite New York Stock Exchange rules that generally require a shareholder vote if a company issues more than 20 percent of its shares, the sale could proceed because exchange voting rules do not apply for a general offering of shares for cash, as opposed to a small group of individuals. The share sale was an illustration of how J. C. Penney had lost the confidence of the markets. Still, the company probably had little choice. Although J. C. Penney is a department store, it is akin to a bank in some ways because it relies on vendor credit to survive. If that credit dries up, then J. C. Penney becomes another Lehman Brothers. The capital-raising was most likely done in such a hasty and disorganized way because J. C. Penney needed to stop a run on the bank in the form of vendors refusing to provide goods on credit. As a further sign that its credit was drying up, the company disclosed on Friday that its cash reserves were forecast to be $1.3 billion as of year-end before the share offering, down from a previous forecast of $1.5 billion. How did such a storied name get in such a difficult spot? Founded more than 100 years ago, J. C. Penney was a sizable but lagging retailer with $17.2 billion in sales in 2011, when William A. Ackman and his hedge fund, Pershing Square Capital Management, bought 16.5 percent of the retailer. Mr. Ackman focused his criticism on Mr. Ullman, the chief executive, whom Mr. Ackman accused of failing to fix J. C. Penney's "uncompetitive cost structure." Mr. Ackman also criticized J. C. Penney's sales strategy, asserting it was dependent on excessive price discounts and cluttered stores. The hedge fund titan won the first round as the board quickly folded, Ron Johnson was brought in as chief executive and Mr. Ackman was appointed a director of the company. Mr. Johnson, fresh from this his retail success with Apple, was a rock star leader who then proceeded to fail in a spectacular way. Mr. Johnson followed Mr. Ackman's game plan, transforming J. C. Penny with a "dream team" of other executives. The team did away with J. C. Penney's promotions and discounts and tried to declutter the store with stores within a store, luring away Martha Stewart from Macys. The change merely served to drive customers away, and Mr. Johnson was fired. The formerly docile board re-emerged. J. C. Penney's chairman, Thomas Engibous, led the charge to bring Mr. Ullman back. Earlier in the year, Goldman Sachs, which had advised J. C. Penney in its defense against Mr. Ackman, arranged a $2.6 billion loan to shore up the company's liquidity. Mr. Ackman left skid marks departing from the J. C. Penney board. He sold his stock for a $700 million loss, but only after issuing a huffy letter complaining about the board's decisions. In the wake of Mr. Ackman's departure, George Soros bought about 9 percent of J. C. Penney, as did Glenview Capital. Another hedge fund, Perry Capital, bought an 7.3 percent stake. Mr. Ullman quickly went back to the old strategies. Things got worse. The strategy of simply being the old lagging J. C. Penney instead of the imploding J. C. Penney has not comforted Wall Street. The effort to raise capital was the final straw for many investors. The company's stock price, which reached a high of $87.18 in 2007, has fallen 55 percent so far this year. Insurance on the company's debt in the form of credit-default swaps is estimating a bankruptcy probability in the next five years of more than 50 percent. In response to a request for comment, the company provided information as to why the share offering did not require a shareholder vote, but did not respond to a request for broader comment. So who is responsible for this sad state of affairs? In the old days, identifying the person in charge was easy. The chief executive was viewed as the company's leader, with the directors were usually handpicked by him. When a problem hit, he took control and was responsible. Shareholders and even directors were largely absent from the decision-making process. Today, the board is increasingly prominent, and chief executives serve at the whim of a sometimes fractious board. Shareholders are also increasingly active, willing to struggle with a board over company strategy and direction. And advisers are always circling, willing to charge fat fees to help, and in doing so, they end up driving the bus. Shareholder activism and board control has many benefits, but there is a downside. The result is that too often, many people are trying to steer the company. It also means that increasingly executives are not sure who they work for as multiple constituencies struggle to control the company. And all of these constituencies must be paid heed. The result is mishmash governance, lack of direction, or even worse, lemminglike direction following the path of least resistance and well-paid advisers. This in part explains the mess at J. C. Penney. Capital-raising is about moving quickly and smoothly to bolster market confidence. But J. C. Penney's capital-raising was done in a way that guaranteed a lawsuit and looked like no one at J. C. Penney was in control. The board of J. C. Penney took a stand against Mr. Ackman, but bringing back an old, declining strategy and begging customers to return does not seem like a long-term solution. Instead, it looks simply like a reaction to Mr. Ackman. Basically, having rejected the hedge fund manager's strategy, the board is left with nothing but its old views. As J. C. Penney struggles, the new hedge fund investors are not likely to sit on such large losses lightly, meaning more struggles for control (Perry Capital announced on Monday it had sold half its stake). And Mr. Ullman will continue to try to placate multiple masters without perhaps the experience to fix a struggling operation. So, without the board doing what is expected - setting a strong, viable direction - expect more turmoil at J. C. Penney. The question of who is driving that change and for what end is, unfortunately, also a problem for many other companies today. An earlier version of this column referred incorrectly to the business deal between J.C. Penney and Martha Stewart. The agreement between J.C. Penney and Ms. Stewart's company, Martha Stewart Living Omnimedia, remains in effect and has not been canceled.