Archives for posts with tag: Board of Directors

Wall St. Journal article: Activist shareholder Nelson Peltz threatens to break up Pepsi. Their Board says, no thanks.

Facts: The term “activist shareholder” is a Wall Street polite term for a firm that buys a small percent of a company’s stock and then threatens them with either a takeover or demands seats on their Board or something. Many people do this these days. Carl Icahn buys some Apple shares and demands stock buybacks. The activist shareholder does this for a couple reasons: the firm’s stock price seems low to them and they can make a lot of money on re-selling the shares if the price moves up. Corporate Boards really dislike these people.

Facts: Pepsi sales are $66 billion (a Fortune 500 top 50 firm). Half are beverages and half are snacks and cereals. The snacks business is growing well in sales and profits. The original core beverage business much less so, even though this includes Gatorade and Aquafina water. Apparently, selling sugared drinks and old soda pop is not what it was years ago. Pepsi is resisting Mr. Peltz’s suggestions, but said they would increase dividends and buy back more common stock to make him happy (and hopefully go away!) Just don’t mess with our Doritos!

This article reminded me of two related conversations I had recently: First, a friend and I were wondering how very large firms like General Electric are able to manage themselves. Our agreed answer was that they are not. GE sales are $150 billion which ranks it the 8th largest U.S. firm. It is truly a very mixed conglomerate with appliances, energy (nuclear power equipment) , transportation (trains),  aviation (engines) and finance. Very few of these products, industries or markets have anything to do with each other. But GE’s senior management are some of the highest paid corporate people.

Second, a couple friends asked why some giant companies keep buying other businesses trying to get even bigger. One asked if it was due to the egos of the senior people. A very appropriate and partially true comment. But there is another much more basic reason. And it goes back to my old friends in Human Resources and one of my favorite topics, Management Compensation.

You see, most companies set their salaries and bonus levels in large degree based on the size, usually in sales, of a business. When I was at USG Corporation, the headquarters people were paid the most. Then those who ran the largest business, Gypsum Wallboard,  the next most and so on down the line. And this is not just the President or CEO of a given business, it included all the senior management and on down to managers. For in Management Compensation, size does matter. You might ask, isn’t it harder to manage a bigger business? Answer, no; it’s harder to manage a more multi-faceted or troubled business. Or to manage an international firm with many different country locations, laws, and taxes than one giant U.S. based business. You might also ask, shouldn’t a firm’s Board of Directors figure this out and pay what is right? Well, the Board usually relies on outside Compensation Advisors who are hired by….. you guessed it the company’s Senior H.R. person! Not much help there.

So why do people like Nelson Peltz or Carl Icahn go around and threaten these giant firms? To make a fortune off the money they invest in these companies’ common stock, of course! But how do they know that nine times out of ten they will make money doing this? Because they know the following secrets. First, giant firms really do not maximize shareholder value over the long run by buying (often at huge premiums) and then trying to manage very different businesses. Most of these bolted together giant firms would be more successful and worth more as a smaller  firm or as a part of a similar business. Peltz wants Pepsi’s snacks to merge with Mondelez International which used to be Kraft’s snack business before he and some of his activist friends got involved. The second and most important secret is that the Senior Management of most of these giant firms will do anything in their power to get rid of these activist investors so they can continue to collect large salaries and bonuses based on the fact that they are a Fortune 10 or 50 giant firm. It takes a unique CEO and team to decide to breakup this game and take a chance on actually trying to run a smaller company versus a conglomerate. And remember it is tough being a CEO since their average tenure (or corporate life) is 5 years. They may need that money someday.

So good luck to Pepsi and their Senior Management. As an aside, I have not drunk a Pepsi in years (Vitaminwater instead) but I do love their Doritos and Lay’s chips!

Those who have followed this blog know that one of my favorite subjects is Fraud. Mainly the type committed by those who make the most and need the money the least: Management Fraud. But there exists, of course, a million other types of fraud, from con men to tax evaders. Which brings us to this tale of two famous or infamous fraudsters in the news recently.

Dennis Kozlowski was the CEO of a conglomerate called Tyco. Through acquisitions, Kozlowski grew Tyco into a giant public firm which was very successful and respected by Wall Street. He also managed to get paid tens of hundreds of millions in compensation from salary, bonuses and stock awards. But somehow this may not have been enough. Kozlowski was convicted of “stealing” from his company with an elaborate compensation package and outlandish expenses. These included a $30 million company owned NYC condo with, among other things, $6,000 in shower curtains and over $10million in artwork. You would want your luxury condo to look good after all. And let’s not forget the birthday party for his then second wife on the coast of Italy for which Tyco paid half of the $2 million cost. For all of this he was sentenced and just completed serving over 8 years in prison. One of the harshest sentences ever for a corporate executive. Kozlowski reported to a Board of Directors who were supposed to monitor his compensation and certainly understood much of what was going on. None of the Board were charged. Many business writers believed that Kozlowski’s punishment exceeded the crime in these circumstances.

Ty Warner, of Chicago, invented Beanie Babies and has been listed as having over $5 billion in net worth. But what does Ty do? He puts a mere $100 million or so of it into hidden Swiss bank accounts. Over a decade he uses different names including a foundation to evade U.S. income taxes. He has now paid our government over $70 million in back taxes, penalties and interest. The criminal trial just wrapped up. His lawyers argued that this tax evasion was the only mark on his lifelong business and charity record. Seems like a pretty big stain to me. The federal prosecutors argued for at least a year in prison as an example to others. The Chicago judge ignored federal guidelines of up to five years in prison and sentenced Warner to two years of probation and community service.

It was tax evasion that finally got Al Capone, also of Chicago. Tax criminals and corporate criminals should be treated the same. Ironically those who perpetuate most of these Frauds have the most money and the least reason to do so. It is very often more of a second thought or a game to them. So when caught and convicted, they should pay.

So what should we learn from all this? Individuals who commit fraud should be prosecuted with a criminal trial not just an out of court settlement. So often public corporations are afraid to deal with this type of unpleasantness and just announce that someone has left to pursue other interests. If those who commit fraud are not properly dealt with, it sets a terrible example for those who remain. It also allows corporate criminals to go off to some other organization and perhaps act in the same fashion. And it should not matter if the fraud involves expense accounts, kickbacks or tax evasion. Corporate America went through a rough patch with companies like Tyco and Enron grabbing headlines for all the wrong reasons. Some of the punishment was excessive in comparison to earlier times or similar crimes. What we need is consistent sentences based on federal or state guidelines. And even those with records as otherwise model citizens or major charitable donors should do prison time if that is the norm. Criminal Fraud should be followed with criminal punishment.

I have recently complained about Board of Directors especially in large, public companies.  But occasionally, I have run across some real, value adding, hard working Board members. Here is the story of one.

Cole National and its Misplaced Cash:

Cole National was founded after WWII by leasing spaces in Sears stores to make keys. It expanded over the years to leased optical departments and then to one of the first mall kiosks with their Things Remembered Shoppes, which sold items and performed services like engraving.

Cole was a client of my employer, Arthur Andersen, when they expanded rapidly and lost control of their business. One summer, AA&Co. sent several of us to help Cole out. This led to my first ever, face-to-face meeting with a Board member.

My assignment at Cole was to help with their massive cash management situation. For a month, all I dealt with were their many bank accounts scattered around the U.S. Perhaps we should call it their cash unmanaged system. Why? Due to their focus on rapid growth through acquisitions and new stores, they had lost control of their cash. At the same time due to heavy debt and a retail downturn, they were losing money and their stock price was falling. When this happens, even an often reluctant Board of Directors is forced to got involved.

Cole had not been able to track their cash flow or even reconcile their three hundred bank accounts for over six months. You may think this is a very rare event, but I can assure you that companies often lose control of aspects of their businesses.

So what did we find? Retail stores were being opened so fast that their sales and cash were piling up in some small, remote bank and never being transferred to headquarters. With some of the recent acquisitions, large cash escrow or down payments were placed in bank accounts that were never closed out. There were accounts with large untouched positive balances and some accounts with large overdraft balances and fees. This situation was a textbook on what not to do with cash.

But the worst was the Main Retail account that was supposed to receive all the transfers from the stores. It was not just a cash nightmare, it was an accounting one as well. Cole was trying to account for the sales of their lock and key business separately from their optical and other products by using the proceeds into the overused Main Retail Account.

In the end, we found, in today’s dollars, about $500,000 of cash the Company did not know about; a very big deal when they were having trouble with both earnings and their banks. All of this went into a dozen page report that listed account numbers, misplaced cash balances, and even proposed journal entries to correct things.  I also wrote new procedures for managing and reconciling both the stores and Main Retail account.

Which brings us to the Board of Directors. Our reports were submitted both to Cole’s Controller and their head of Internal Audit. Apparently, the Finance Committee of their Board also received a copy. On one of my last scheduled days at Cole, their Controller comes over and says that a member of their Board Finance Committee wants to meet with me about my report. At that point of my life, I assumed this was like meeting with another client executive, no big deal. I had not yet been trained on the almost mystical importance of such men. Only in my later years, did I learn the vast power of Board wizards and the need to constantly care for and feed them (both data and food).

A meeting is arranged with the Board member. I assumed the two of us would sit down across a desk and chat. But no, the meeting will be in the Board room. And besides the two of us, the Corporate Controller, the Manager of Corporate Accounting, the head of Internal Audit and I am not sure who else shows up. This is before Power Point, so the only media is my dozen page report which everyone seems to have a copy of. The Controller introduces me and asks me to summarize my report’s highlights. The dialogue goes like this:

Me: we found dozens of overdraft bank accounts.

Director: is this true?  The Cole people nod yes.

Me: we found dozens of accounts with untapped cash.

Director(louder): is this true? Cole people nod yes.

Me: in total we discovered over $500,000 in unknown cash.

Director(louder yet): is this true! Another yes nod.

Me: we reconciled 300 bank accounts for 6 months.

Director(pounding on table): I guess this is true! Yes nods.

Me: we wrote procedural recommendations on all this and how to reconcile the Main Retail bank account which will take someone 1 week a month to do.

Director, turning to me, shouting: 1 week that is crazy!

Me: it took me a week the first time, now I am down to three days. The person I just trained will need 1 week.

Director, yelling at Cole people: adopt these new procedures in a hurry and never let this happen again!!

Director, to Me, smiling: good job, thank you.

What did I take away from that first Board member encounter at Cole and what have I learned later after many encounters?

Then, Board members must often get really involved!

Later, not. If this was true, Boards and companies would be much better off. Directors rarely get this involved and, if they do, it’s because there is a terrible crisis.

Then, the Cole managers seemed afraid of the Director.

Later, sadly true. We are told that Management serves at the Board’s pleasure. But fear is not good in a Zoo or a Board room.

Then, Directors yell at Management but are nicer to, and even compliment, outside Advisors, like me.

Later, Directors are often too nice to and influenced too much by Advisors. Directors rarely yell at or confront company managers even when they should. This is especially true in a full Board meeting with dozens of people.

So what are the overall takeaways from this Business Zoo tale? For managers, when you meet Directors, know your material and act confident, not afraid. And for Directors, get more involved in the details, even if its only Cash; it will be noticed by management and can really help.

My wife invests her money in stocks she likes. She liked Apple products long ago and insisted, against my and our financial friends’ protests, on buying their stock in the $30 range when no one wanted it. Had I taken all of our money and done that… well we didn’t. Then she insisted on buying the stock where her brother works, Honeywell in the $50 (it is now over $80). And where her sister worked, J.C. Penney,  which is one of her only stock dogs, dropping from over $40 per share to the teens.

In the mail last week, we received a very official, class action looking lawsuit form against J.C. Penney and all their Board of Directors. For once I read this document. Only retired, former CFOs would ever do such a silly, time wasting thing.

Here is what this Proposed Settlement of Derivative Action notice seemed to say:

-someone named Everett Ozeene (now deceased) sued the company and all the Directors individually because of how they paid certain Executive Termination Pay. No mention of to who or how much, which is the more fun part I would have enjoyed reading.

-the notice then said this was not a Class Action suit on behalf of all Penny’s shareholders and that no shareholder would get any money! Now I am very curious. Why are we doing all this?

-it was then explained that J.C. Penney agreed that they had done something wrong involving Executive Termination Pay and that their Board of Directors’  Compensation Committee would do a better job on this for the next four years. Some detail was provided like making clear and in simple English these Termination agreements in future SEC filings. (Good luck on the simple, clear English part.) The Compensation Committee would meet four times a year and discuss all these matters with the full Board of Directors, etc. (If they had not done most of the things in the notice, they should get fired and sued for real.)

-I am still reading and re-reading because I don’t get what this is about… until the last section of the notice that states that the Lawyers who helped Mr. Ozeene bring this critical matter to everyones attention will receive $5,000,000 for their help and trouble. As often, I am shocked and disgusted, even though by this point of my business life, I have seen and heard this story too many times.

So poor J.C. Penney,  whose stock price has fallen dramatically in the last two years, pays $5 million to make this lawsuit of questionable value or merit go away. Why do companies and their Boards agree to pay off lawyers? Because they are afraid. Afraid of litigation in general.  Afraid of  having their Senior Officers having to testify. Afraid of having their precious Directors being personally suit and having to testify.

But mostly large,  public companies like J.C. Penney are afraid of looking stupid in a trial and having it published in all the financial media and on CNN.

As everyone knows, there is no room for fear in life or in business. We discuss this a lot in my book, The Business Zoo.

We have written before about the endless Class Action suits involving asbestos where whole industry segments have gone into bankruptcy. Or about the injustice to a fine old firm like Dow Chemical involving faulty implants that really were not faulty. I hope someday the public in general will help our state and federal representatives do a better job of rewarding those who are rightfully damaged versus a part of the legal profession who are so often wrongfully rewarded. Let’s all try to be a little more brave about doing the right thing.

Note to self: listen to wife more as she suggested we should have sold Penny when her sister retired earlier this year!

Disclosure: I own a very modest amount of the stock of Office Depot. I brought it because the people who work in the Chicago and Florida stores we frequent are so helpful and polite (and thus well managed). They even talked me into their frequent buyer program and each year I get about $20, which is enough for a modest bottle of wine.

Because of my vast ownership, I and thousands of others, received the Joint Proxy Statement to announce their merger and to get my vote. The second line on the cover announces that this is “A Merger Of Equals”.

So, I naturally found this lead-in fascinating enough to actually read much of the important parts of the 250plus page Proxy. In the finer print, you find some interesting details: 1. Office Depot shareholders will get 55% ownership to 45% for Office Max, very interesting.  2. Office Max legally will become a subsidiary of Office Depot, also interesting. 3. For tax purposes, they hope to qualify the merger as a tax-free reorganization which makes sense. 4. For accounting purposes, this will be an acquisition by Office Depot of Office Max, those pesky accountants just don’t like equals! 5. The new Board will have equal representatives from both and will elect a new Chairman,  senior team, and headquarter location. That meeting would be fun to listen in on.

I am very sorry to tell the fine employees of both firms, but there are “No Mergers of Equals!” The banking world loves this phrase and uses it constantly. It sounds friendly and cooperative and even nice. But if you look at the history of bank mergers, someone always brought someone, period. Modern day JP Morgan/Chase goes back to Chemical Bank buying half their New York competitors. Most of the deals were called mergers of equals. But the old Chemical Bankers always came out on top. And within three to five years, two thirds of the other bank’s senior people were gone, “to pursue other interests”. Yes, Jamie Dimon, a non Chemical banker,  is now Chairman, but that is another story.

The reason most mergers can not be mergers of equals is that people in the same industry, whether it’s banking or office supplies, hate their main competitors at worst, and distrust and dislike them at best. Even in the same industry, the culture and leadership style of each firm is always unique and never easy to blend. That is the nature of companies and the people who run them. It is a dog-eat-dog world out there and in my forthcoming book, The Business Zoo. Deal with it.

Who will come out as the real buyer and winner of this deal? I don’t know but I am rooting for my Office Depot team!

Note to self: send in that Proxy, my shares may turn the tide!

My long-time banking guy friend, Jerry, sent me a follow-up to my last post about Executive Compensation. He provided a link to a CNBC article called “Pay for Boards at Banks Soars Amid Cutbacks.” The full story can be seen at

The key point is that since the financial crisis (which was not caused by, but certainly exaggerated by, banks), the compensation for the Boards of Directors of the largest U.S. banks keeps rising. This is occurring while the banks are receiving more governmental pressure on their banks’ officers pay and bonuses. The article cites one of my favorite banks, Goldman Sachs, where many of their 13 directors earn over $500,000 a year for a part-time job.

In defense, the article goes on,  some Board experts are saying that banks are trying to recruit directors with more financial expertise to provide better oversight and avoid some of their past problems.

Now, I am all for avoiding problems, especially those that can cripple our whole economy.  I also believe that historically many bank boards, like many general corporate boards, fall into what I call my One Third rule. That is that One Third of directors are not qualified to be on a given board.  One Third of directors may be qualified but do not have the time or interest to be on a given board. And, the final One Third of directors are qualified, spend the time and energy,  and do most all the work, on a given board.

In my book, The Business Zoo, we have a separate chapter that explains this director rule further. We also tell stories of Boards that do a good job and some where Boards do not. We also suggest Management or Advisory Boards for most smaller, private firms and explain their value.

But let’s go back to the article about bank boards and what sounds like their excessive and increasing pay.

Leadership, we are rightly told, starts at the top. The Board of Directors is as top as we get in the world of public companies or many private firms and even nonprofits.

Senior Management, serves at the pleasure of the Board. The company officers work for the Board. The Board each year elects or re-elects the senior officers and approves their pay.

So, Directors and Boards need to set an example and actually lead the firm. This should include being sensitive to the perception of their own pay by their shareholders and the public. Strong Board leadership can also occur by not agreeing to everything management proposes and learning to say No more often and, at times, to say goodbye! Goodbye to CEOs or other officers who do not work out. That is real Board leadership.