Here’s How Shareholders Get Short-Changed

Let's examine a case where shareholders should be fast losing their patience, if they didn't lose it long ago. Green Mountain Coffee Roasters' (NASDAQ: GMCR  ) stock chart illustrates a sad story over the past 12 months. This is seriously sad business, including the overhang of serious accounting concerns under investigation by the Securities and Exchange Commission and huge issues like patent expirations and major competitive threats from coffee rivals like Starbucks (NASDAQ: SBUX  ) , which recently launched its own single-serve home brewer.

Could a new CEO save the day and clean up this mess? Maybe, if you believe in miracles, but Green Mountain investors who are tempted to put a positive spin on the company's new CEO appointment might want to temper their enthusiasm. A lot of shareholder money's going out the door right away with this move.

When new blood's too rich
Lawrence Blanford, who has been at the helm of Green Mountain Coffee Roasters since 2007, is retiring. The outgoing chief executive will be replaced by Brian Kelley, who previously served as chief product supply officer for Coca-Cola Refreshments, an important North American unit of Coca-Cola (NYSE: KO  ) . Sure, it's arguable that the company has some serious star power coming to its top spot.

Regardless, shareholders who have suffered this past year -- and are cognizant of the major, scary issues Green Mountain's up against -- might look askance at Kelley's employment agreement. His annual base salary is set at $900,000 right off the bat. That of course does not include other financial components of salary such as bonuses, stock options, and so forth.

Kelley's slated to officially become the top dog as of Dec. 3, and although any shareholders who are hanging in there probably hope he will hit the ground running, he's guaranteed to hit the ground financially flush no matter what. Boom: Kelley receives a one-time $600,000 signing bonus. Should something go wrong during his tenure, that bonus is eligible to be demanded back, but American boards generally don't take a hard line on these issues.

And wait, there's more. The company will see to it that Kelley will be reimbursed for relocation expenses related to his new gig, to the tune of $500,000. So, Green Mountain's new CEO is basically entitled to more than a million dollars right off the bat.

And wait, there's even more! Kelley will receive the equivalent of $3 million worth of what Green Mountain dubs "performance shares" and restricted stock grants to help "replace" his forfeited equity by leaving Coca Cola Refreshments. Although these are tied to performance metrics and will vest over time, he's enjoying a lot of immediate awards for his agreeing to be plopped at the top of Green Mountain.

Kelley also gets goodies like stock options, death and disability benefits (like a "pro-rata bonus" should his employment be "terminated" due to death or disability, which is bizarre in itself since dead men don't run companies, even if dead wood sometimes does), and a golden parachute.

History repeats
Granted, deals like this one aren't flukes but rather common. However, shareholders should find it even more troubling when companies that are already in plenty of trouble -- where shareholders have lost so much already -- dole out millions for theoretical or anticipated success (which may or may not occur) instead of proven turnaround performance after the fact. Companies also pay out millions for failure time and again.

Hewlett-Packard's (NYSE: HPQ  ) board allowing disgraced Mark Hurd to leave with tens of millions in severance is just one of many historical examples of boards that could have pulled a "with cause" termination to escape such financial obligations, but chose not to. Meanwhile, although HP's Leo Apotheker wasn't a success story when he left the helm after 11 months -- plus the current Autonomy debacle that originated on his watch -- he still walked away with $13.2 million in severance.

Best Buy (NYSE: BBY  ) has provided another outrageous example of this twisted version of "pay it forward" for the CEO class. Brian Dunn left in disgrace, with $4 million in severance. New CEO Hubert Joly had not only been enticed to come aboard with a pay package worth $32 million over three years (including a guaranteed cash award of at least $8.75 million for the 2014 fiscal year), but had he had trouble obtaining a work visa due to his French citizenship, he would have received a guaranteed $6.25 million payment.

Key governance lacking
CEO compensation policy is one of the top issues in the corporate governance realm, and it's pretty amazing that such outrages continue. It's particularly shocking given the fact that shareholders are now allowed to vote on compensation policies due to "say-on-pay" rules, and some pay schemes at major companies have been defeated in shareholder votes. So it's fascinating that companies continue to push the envelope with packages like these; we shareholders must flee or, in a more significant move, hold and vote against such policies.

When it comes to Green Mountain, the best time to bail right was around the time allegations of accounting irregularities came to light. Add up the competitive landscape and now the rich pay package for the company's new CEO, and I'd say hitting the exits to search for greener pastures (and safer shelters) is way overdue.


With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find our recommendation for how to play the company in our new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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  • Report this Comment On November 28, 2012, at 5:19 PM, LQM2 wrote:

    Article is so slanted and naive its remarkable. First, GMCR went up 27% today. Obviously the market isn't overly concerned about the patent issues or the SEC. The fact that Kelley signed up indicates those issues aren't "huge" so he's in effect paid for himself already. Second, the comp package isn't out of line. GMCR has 150mm shares. A $1 move in share price changes shareholder value by $150mm. But Alyce would have GMCR hire a lesser qualified CEO to save $500k in relocation? Alyce needs to grow up.

  • Report this Comment On November 30, 2012, at 2:37 PM, GregKS wrote:

    I'm not sure what is slanted or naive about this article. The way I look at “accounting irregularities” is that it is a nice way to say somebody lied and cooked the books. I do not invest in companies with “accounting irregularities”.

    Brian Kelley is probably a capable manager and nice guy, but going out on a limb, if he was as capable as GMCR thinks he is, why didn't Coke see his value, respond accordingly, and offer a compensation package as good as or better than GMCR. And then, $500k moving expenses? Wow.

    Were I a GMCR investor, I think I would be somewhat worried that about Starbuck's introduction of its own single cup coffee server. On top of this, there are now several other companies offering their own prepackaged coffee cartridges for the GMCR coffee maker, further reducing GMCR's possible profits.

    GMCR up 27% 2 days ago means it is still down 30% over the past year, 20% YTD. I'm not sure I would quote Mr. Market as being knowledgeable about the true value of anything past the last trade. Housing bubble, Tech bubble, or going back 500 years, Tulip Bulb bubble are prime examples of Mr. Market's values.

    Greg

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