Urban Outfitters Needs a Board and Compensation Change

Urban Outfitters (URBN 0.59%), the trendy clothing retailer, has seen it's stock price lag peers for a number of years. This company is fraught with issues and investors should be curious as to why and what upper-level management is doing about it.  Their performance has been lagging, they are not listening to customers, and are riddled with a whole mess of corporate governance issues that make us wonder where to find Carl Icahn. Here we will focus on corporate governance issues related to the board of directors and executive compensation.

Performance history
Let's start with Urban Outfitters' performance versus the S&P, and more specifically the retail sector. 

Source: Urban Outfitters 10-K

Over the period from 2009-2014, Urban Outfitters has lagged its peer group by a substantial margin. This mainly resulted from the namesake store's lack of performance, but more on that later. Despite this performance, or lack thereof, director and executive compensation has skyrocketed. Shareholders own the company, the managers and executives work for those shareholders, and the board acts as a fiduciary for the shareholders. So why do these executives and directors keep getting paid millions of shareholders' cash? Lets take a closer look at the directors and their qualifications. 

Board of directors
The Urban Outfitters board had staggered elections until 2012 when shareholders demanded annual elections and succeeded in getting the votes. Still, some directors will not be up for reelection until 2015 because they had been elected to three-year terms prior to the annual election overhaul. The CEO and chairman of the board roles are occupied by the same person. Shareholders have tried to split up the role during the past two years, but narrowly lost each time. Management would be wise to take an interest in what Urban Outfitters' owners want and compromise. The roles would undoubtedly be separated if not for company insiders owning large percentages of the stock. 

The board is comprised of seven directors. The average age of these directors is 63 years old. They're all Caucasian men except for one woman, the CEO's wife. Shareholders have been very close to voting out Scott Belair, age 66, for the past two years and came close to getting the CEO's wife out this year. I suppose shareholders have started to realize that having a board full of old men trying to oversee a company with a target market of young men and women age 18 to 28 is not the smartest move. This board is not just old, the majority of directors have served since the 70's or 80's. The two newest directors are the CEO's wife who joined in 2013 and an independent director who joined in 2011. The two co-founders have served since 1976. The other three joined in 1985, 1989, and 2002. Terms of this length bred complacency in decision making and strategic direction and the share price provides evidence of this.

Urban Outfitters does have a majority of independent directors, but that's where the positives end. The CEO, chairman, president, and co-founder is Richard Hayne. His wife, Margaret Hayne, is a director and the Chief Creative Officer. One independent director, 58 year old Ed Antoian, is either a partner or CIO of three investment companies and a director of another. Is Mr. Antoian devoting enough time to Urban Outfitters? The 66 year old Scott Belair is the other co-founder and is the principal of a finance company and a director of two banks. The three other independent directors consist of Joel Lawson who has M&A experience, Robert Strouse who is a corporate lawyer with private equity experience, and Harry Cherken who is another lawyer with real-estate experience. Why do five out of seven directors of a clothing company only have track records of working for finance and investment companies or being lawyers? The other two out of seven are the CEO and his wife. 

This board could benefit from either having more directors than seven for further diversification of backgrounds and experience or it could get rid of them completely. I think the latter would produce the most benefits for multiple reasons.  Shareholders have been close to ousting a few of them in recent years. Continued under-performance may open shareholders' eyes, but that will mean further deterioration in the share price. 

Director and executive compensation
At the beginning of 2010, Urban Outfitters' share price sat at $34.00. Presently, in July 2014, Urban Outfitters trades at $34.00 per share. That's flat over a four-year period. Management uses the S&P 500 apparel retail index in its filings for peer comparisons. This index is up over 150% over the same time-frame. Let's look at director compensation over the period.

Source: Urban Outfitters Proxy Filings

In each of these years, the company paid its directors $100,000 in base salary and the rest came from option awards. Why did the directors receive such heavy compensation through stock options while long-term shareholders have been awarded with a flat share price over the period?  Next, we'll move on to executive compensation.

CEO and chairman Richard Hayne has had a $1 per year base salary since 2009, but is entitled to performance-based awards. The reason for this is that he is the largest shareholder of the company's stock. The CFO's base salary has increased 65% from 2012 to 2014 and total compensation including stock options has increased 100% to $1.55 million.  The ex-CEO will still rake in $2.7 million in 2014 after receiving $4.1 million in 2013. The man at the helm of the namesake Urban Outfitters brand, Ted Marlow, saw his base salary increase from $600,000 in 2013 to nearly $700,000 in 2014. Mr. Marlow's total compensation with stock options included totaled $4.1 million and $2.8 million in 2013 and 2014, respectively. 

I could go on, but the idea is clear. The executives are increasing their base salaries at an alarming rate while the company is still awarding them with stock options worth millions of dollars each year. Under the equity compensation plan, the company still has 5.8 million shares to award to under-performing executives. The incentive plan only received 53% approval from shareholders when it was set up in 2008, but the kicker is that executives collectively owned over 31% of the stock which is arguably the only reason the vote passed. The 2008 plan came up for a vote again in 2013 and passed, but barely.  This time executives only owned 24.8% of the shares. Presently, Mr. Haynes' ownership has dropped to 15.7% from 20.3% in 2009. There's nothing like selling shares for a vote of confidence. 

What does it all mean?
Urban Outfitters may be the trendy shopping choice of young adults, but this company raises alarms that investors should notice. Its sheer lack of performance relative to its peers should have investors asking some very tough questions. The board of directors is full of conflicts. These elected directors are awarding themselves outsized compensation despite the company's waning share price. The aging seven-person board is mainly comprised of lawyers and investment managers. The CEO and his wife take up two slots. Investors have been pushing for change and the campaign shows signs of progress, but executives' large ownership stake is a major hurdle to overcome. Hopefully, the situation can be resolved because this retailer could use some work.