Southwest Airlines will overhaul its board of directors as it strives to stave off a proxy fight.
Six of Southwest's 15 board members will step aside at the company's board meeting in November, and board chairman Gary Kelly, who was the Southwest CEO from 2004 to 2022, will step down after the company's annual meeting next spring.
Kelly who has headed the board since 2008, had hoped to stay on as chair until 2026. But activist firm Elliott Investment Management has persistently insisted upon his ouster since acquiring an 11% stake in the airline in June.
Tuesday's announcement came after a meeting between Elliott and Southwest board representatives on Monday at Elliott's New York office. In a letter to Southwest shareholders, Kelly announced that Southwest will take on four replacement board members soon, with up to three of them coming from a list of 10 potential nominees that was proffered by Elliott last month.
"We acknowledge that significant changes are necessary to position Southwest for the future and are committed to implementing those changes," Kelly wrote. "Our board welcomes input from all shareholders and is pleased that yesterday's meeting with Elliott was constructive and that we are maintaining an open dialogue about changes underway at Southwest and how Elliott and its board candidates may contribute to those."
Kelly also wrote that the board stands firmly behind CEO Bob Jordan, a former deputy of Kelly's and a 36-year veteran of the airline. Elliott wants Jordan out.
"Bob has a proven track record over decades and, most importantly, he has what it takes to lead Southwest through a significant transformation and usher in a new era of profitable growth, innovation, and industry leadership," Kelly wrote.
In a Tuesday morning response, Elliott partner John Pike and portfolio manager Bobby Xu called the decision for nearly half of the Southwest board to step down "unprecedented." But they stopped well short of withdrawing a proxy challenge.
"We are pleased that the board is beginning to recognize the degree of change that will be required at Southwest, and we hope to engage with the remaining directors to align on the further necessary changes," Pike and Xu said.
"The need for thoughtful, deliberate change at Southwest remains urgent, and we believe the highly qualified nominees we have put forward are the right people to steady the board and chart a new course for the airline."
Elliott has blamed Southwest's current leadership for declining margins in recent years compared with United, Delta and American, as well as for a plunging share price, saying the carrier has been to slow to evolve in accommodating changing consumer preferences. The firm also accuses the Southwest board of being too closely tied to Kelly and Jordan.
The slate of 10 board candidates that Elliott put forward is heavy on individuals with executive level experience at other airlines, including former CEOs of Virgin America, Air Canada and WestJet.
Kelly noted in his letter that eight new directors have been named since 2021 while five have retired. Still, the concessions offered by the company at the Monday meeting will be deeply transformative to the board. The moves will reduce the size of the board next spring from 15 to 12 and reduce the average tenure of board members from 7.3 years to 2.5 years. Among those who will step down in November are the two longest-tenured board members -- lead independent director Bill Cunningham, who has been on the board for 24 years, and 18-year veteran David Biegler.
Southwest has already announced significant changes to its commercial strategy, including plans to do introduce extra-legroom seats and to replace the airline's open-seating process with assigned seating. The carrier has also recently begun displaying fares on Google Flights and Kayak, a substantial change to a long-reclusive distribution strategy.