Last week, Men's Wearhouse (TLRD) founder and chairman George Zimmer was terminated by the company's board of directors. According to him, they did so because the board is choosing "to silence my concerns."
It's still too early to determine just who is at fault here. But it brings up an oft-overlooked issue: the sometimes hostile, sometimes too-close relationship between a public company's board of directors and the company's executives.
There are a lot of companies whose boards lean toward the "too-close" side of the spectrum, lavishing directors with cushy perks and benefits -- often at shareholders' expense. We'll take a closer look at five in particular in just a moment.
But first let's answer a very important question...
What exactly is a board of directors supposed to do?
A board of directors is the primary governing force of a company. It is tasked with the duty to protect shareholders' money and ensure their investment continues to grow.
Members are charged with hiring and approving compensation for a company's CEO, approving major expenses, and overseeing major business decisions such as initial public offers, mergers, buyouts, and acquisitions.
A board usually consists of businessmen and women (but still mostly men, these days) who bring to the table a unique set of skills and experience that should help guide the company's direction. And for this experience and the time they spend working with the company, they get paid.
It's a sweet gig if you can get it
Polish up your resume, because according to MBA Online, "being on a board of directors is one of the most lucrative career options available."
The average director for an S&P 500 company earned $242,385 in pay and other benefits in 2012, according to Bloomberg BusinessWeek. All this for attending roughly eight meetings a year.
And therein lies the problem for shareholders.
Obviously, such a cushy gig is difficult to walk away from -- and the numbers back this up. Sixty-four percent of directors at S&P 500 companies have served on the board for 10 to 15 years; another 5% have served for more than 15 years, according to executive recruiter Spencer Stuart.
And as time goes on, a director faces an internal dilemma: Do I question a company's decisions and direction at the risk of losing this lucrative source of income? Or do I largely remain silent and continue to collect my annual checks?
Unfortunately, most tend to choose the latter.
Data show that the longer someone serves on a company's board of directors, the less committed that director is to their primary tasks, according to Jim Westphal, a professor at the University of Michigan's school of business. They ultimately turn into "zombie directors," according to Patrick McGurn, special counsel for Institutional Shareholder Services.
And as their oversight begins to falter, shareholders (as individual investors, mutual funds, and pension funds) are often the ones who ultimately suffer.
Long live the board!
So let's take a look at five companies that are lining their directors' and executives' pockets -- and could have detrimental long-term effects on the business:
|
Company |
Average Board Tenure |
Average Board Compensation |
5-Year Absolute Stock Return |
Problem |
|---|---|---|---|---|
|
Tootsie Roll Industries (TR 1.03%) |
30 years |
$84,533 |
49% |
CEO Melvin Gordon and his wife, President Ellen Gordon (ages 93 and 81, respectively), who are also board members, own the bulk of the company's stock and receive some cushy perks, including access to a company plane valued at more than $1 million and $10,000 a month to assist with the cost of an apartment. They have established what The Wall Street Journal calls a "secret empire" of board members who refuse to share information with analysts and shareholders. |
|
Oracle (ORCL -1.02%) |
14.8 years |
$615,866 |
56% |
Oracle's board -- chock-full of insiders -- has some of the highest-compensated board members in the world. |
|
Abercrombie & Fitch (ANF 0.90%) |
8.4 years |
$214,546 |
-24% |
These heavily entrenched board members continue to lavishly pay the company's CEO, regardless of the company's performance. CEO Michael Jeffries was paid $8.2 million last year, despite the stock dropping more than 30%. |
|
Fidelity National Information Services (FIS -0.32%) |
5.8 years |
$1,802,249 |
114% |
The average board compensation for this company is inflated because they agreed to convince 68-year-old director William Foley II to stick around another three years. The tab for that move? $9.5 million cash. |
|
Goldman Sachs (GS 2.92%) |
5.7 years |
$419,958 |
-8% |
Pay for board members at Goldman has steadily risen since the financial crisis. The company says it's to reflect the high level of experience needed, but -- as mentioned above -- rising pay makes it less likely for directors to shake things up, regardless of how necessary it may be. |
Source: Author's calculations based on SEC filings. Board tenure includes employee directors; board compensation does not include employee directors.
Of course, when a board of directors is so entrenched with a company's management -- monetarily, through tenure, and through personal friendship -- replacing a board of directors can be a tough battle. So it may be a lost cause.
Nevertheless, it serves as a good reminder to be cognizant of how independent the board of directors really is before investing in shares of any publicly traded company.
