American Apparel and Lululemon: Sex, Lies and Firm Value Revisited

I've written before about our paper, Sex, Lies, and Firm Value.   Sound corporate governance is immensely important in protecting and creating shareholder value.  Sound governance requires the correct tone of management at the top of the firm, and the boards insistence on this tone.   Our research examines the links between indiscretions in a manger's personal lives and the impact on the firm.  We are continuing our research on the topic, and alas, Wall Street is continuing to provide us data points.  The following quote comes from an interesting article by Matt Egan, writing for CNN Money.  

"Dov Charney, the ousted chairman of American Apparel, is known for walking around his factory in his underwear and talking openly about his sex life. The company's sales have plunged in recent years and its stock now trades for 70 cents, down 96% from its high of nearly $17.

Lululemon founder Dennis "Chip" Wilson imperiled his company's brand last year by making snide remarks about overweight customers. Wilson recently stepped down as chairman after Lululemon's share price plunged in half over the past year."

Read Matt's entire article, and his interview with one of my coauthors here.  Note the incidence of founders in our sample of indiscretions.  Also, while we are revising our research on the subject, the previous version of the paper can be downloaded here.

All the best,

Ralph

When Say on Pay Becomes Binding: Australia's Two Strike Rule

Hello from Perth, Australia.  As some of you know, I am on sabbatical, currently touring Australia.  Last night I had the honor of talking to a local CPA society on Corporate Governance.  The question of Australia's two strike rule came up during the discussion.

The two strike rule is an interesting, if controversial rule in corporate governance.  If a board receives a 25%, no-vote on its compensation policy for two consecutive years, shareholders vote to decide if the the entire board must stand for re-election.  The rule, implemented in Australia in 2011, gives teeth to the previously advisory Say on Pay.

See this interesting article in The Sydney Herald.

One can imagine the pluses and minuses of such a system.  First, if directors are not responsive to shareholders a second year in a row, the shareholders get additional power to alter that situation.  It is reminiscent of the provisions in some preferred stocks, where if a firm misses dividends for say three years, the stock acquires voting rights.)

On the other hand, 25% might be a low threshold, and less than a majority could hold a firm hostage. Or, as directors often fear during a Say on Pay vote,  a low vote may be the result of something quite different from problems with compensation.  

David Trebeck, the Chairman of Penrice Soda, which recently survived a close call on the two strike rule, commented, ‘‘I think directors generally are more than capable of identifying and responding to prevailing shareholder sentiment without needing a legislative sledgehammer to do it for them."

(Source:  http://www.smh.com.au/business/axe-twostrikes-rule-penrice-directors-say-20130125-2dbam.html#ixzz2hJu9p5li)

The two strike rule isn't the case in the US but, by the way, Australia had Say on Pay, well before the United States.  It makes sense to keep track of what is happening in other venues and use that knowledge to improve practice.  This is NOT to say, I'm endorsing this idea, but it bears watching the empirical results.  

See our related post on Swiss Say on Pay.

All the best,

Ralp;h

CEO Turnover: The Grass Isn't Always Greener

As many of you know, my day job is as executive director of Drexel's Center for Corporate Governance.  The Center has it's own blog run by center director Patricia Connolly.  This week's post features one of my finance colleague's, Ed Nelling, commenting on CEO Turnover.  He gives some great examples and asks some excellent questions.  I think you will enjoy it.  The post can be found here.

Corporate Governance, A View from the Top

Last Spring Raj Gupta, Richard Jaffe and I sat down with Joe DiStefano, a leading reporter for the Philadelphia Inquirer.  Richard chairs the advisory board of our governance center of which I am executive director.  Raj, as you will see, is an important member of our center and was Chairman of Rohm and Haas leading it to a spectacular merger with Dow Chemical (spectacular for Rohm and Haas shareholders at least).   The article describes some of Raj's philosophies on governance, philosophies learned through important work on the boards of companies like Rohm and Haas, Tyco, Vanguard, Dephi and Hewlett Packard.  It is well worth reading.

The entire article can be downloaded here.

All the best,

Ralph 

Do Onto Yourself, Part II -- ABN AMRO vs. CITI

I commented on October 10 that it is better to do onto yourself before others do onto you. The focus was on enacting business model changes before a hostile takeover forces those changes on you. The 2007 ABNAMRO (ABN) breakup was cited as an example. Little did I know that one week later another bank would have change forced upon It. This time it was not from a hostile bidder, but from a hostile board. Vikram Pandit “resigned” on October 16 following a clash with his board -especially its Chairman- over strategy among other items.

Citi’s problem was very similar to ABN’s-its large universal banking model no longer worked. Both banks adhered to a global financial conglomerate strategy. Both banks’ management teams were psychologically committed to the strategy and unable to breakup their respective institutions. This was despite a 90% value decline since Pandit became CEO. Additionally, Citi continued to lag its competitors and traded at 60% of its tangible book value.

Unlike ABN, Citi faced no hostile bidder. Rather Citi’s board decided to take action. It was largely a new board with most members replaced during the crisis. Thus, it had a reduced commitment to management’s existing strategy. Consequently, it was ready to act if management did not act. ABN, however, lacked an independent board. One could argue if ABN’s board was an independent as Citi’s, the ABN hostile bid and breakup would not have occurred.

Again the lesson is clear. The status quo is not an option in a challenging macro and industry environment with lagging performance. Failure to adjust business models will attract either external or internal forces. The golden rule of doing onto yourself before others do onto you remains in full force. The practical implications for firms are twofold. First, examine all business units to see if any of them are past their “sell by” dates. Second make sure your business still makes sense in the post-crisis market.

Hostile takeovers involve a fight over who is the better manager of corporate assets-you or someone else. It is nothing personal-it is strictly business.

Joe