Target (NYSE: TGT ) is famous for appointing insiders to its management positions, but now it looks as if the company is seeking external talent to take over from former CEO Gregg Steinhafel. That may be a good thing given the company's recent failures, overseen by existing management. But that's not my concern here. My concern is the board.
Reviewing the company's proxy statement from last year -- it has not issued one in 2014 -- I found this statement:
One of the primary responsibilities of the Board is to ensure that Target has a high-performing management team in place. On an annual basis, the Board conducts a detailed review of management development and succession planning activities to maximize the pool of internal candidates who can assume top management positions without undue interruption. In addition, the Board has adopted a CEO emergency succession policy to govern unforeseen succession needs.
One of the primary responsibilities of the board? Which it is now outsourcing to executive search firm Korn Ferry. It even claims it has an emergency succession policy to govern unforeseen succession needs -- exactly like this one -- but this also seems to have been: "hire Korn Ferry."
Management must take responsibility for the failures recently besetting the company, but so also must the board.
Of these, its job was to ensure oversight so that protocol would have been in place to prevent the data breach that occurred last November. It should have done more due diligence work on assessing whether an expansion into Canadian markets would be profitable (Target's Canadian operation lost $329 million in its fourth quarter and $941 million for the fiscal year ended Feb. 1). But from a governance standpoint, the third failure is entirely the board's, and it is going to cost shareholders dearly just when they thought their problems were over.
Apart from the damage to the stock price -- down from $62 prior to the announcement of Steinhafel's departure to around $57.60 at the time of this writing, the shares are almost 20% off their 52-week high -- the cost of employing an outside CEO rather than promoting an internal candidate is usually two to three times more expensive. Another bill that will be footed by shareholders.
Lack of board oversight
The 11 directors on Target's board are all paid between $250,000 and $300,000 a year, so you would expect them to be paying attention. Unfortunately, the board is populated with over-busy and long-tenured directors. Of the 11 independent directors on the board, eight are on three or more boards.
Roxanne Austin, president of Austin Investment Advisors, is on five boards in total, including Abbott Laboratories (NYSE: ABT ) , AbbVie (NYSE: ABBV ) , and Teledyne Technologies (NYSE: TDY ) . Anne Mulcahy, former CEO of Xerox (NYSE: XRX ) , is also a director at Johnson & Johnson (NYSE: JNJ ) , where she sits on three committees, and Graham Holdings (NYSE: GHC ) , where she sits on two, and she is chairman of Save the Children. Five directors -- Austin and Mulcahy among them -- have been on the board for more than 10 years, a circumstance that often leads to a lack of real independence. Britain, for example, strongly discourages director tenure exceeding this because of the collegiate effect. Directors become too familiar with management and are, therefore, less likely to challenge them. James Johnson, former CEO of Fannie Mae, is the lead director -- supposedly the strongest independent director -- but he's been on the board of Target for 18 years.
One can only contrast this board's efforts with the seamless transition at Ford (NYSE: F ) and you have an example of a board that has learned from its past mistakes, as recognized by chairman Bill Ford announcing the candidacy for CEO of Mark Fields, Ford's current CFO. As Ford said in his speech last week: "They do a great job when they're in the job. And then they go kicking and screaming.... And then what happens, of course, is chaos ensues." Not so this time around.
Compare this to a board that says it has a plan ... until it is revealed that it doesn't have a plan.
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