A shareholder's call for the Abercrombie & Fitch board to replace the company CEO leaves many questions to be answered.
This week, Engaged Capital, an activist investment firm and Abercrombie & Fitch shareholder, formally asked that the company replace 69 year-old CEO Mike Jeffries after his contract expires in February. While most observers don’t believe that such a request from a shareholder with less than 1 percent ownership will carry much weight, anyone who has spent any time in governance circles knows that boards need to, at the very least, investigate why such a request would be made in the first place.
Engaged Capital’s motives were very clear: the firm suggested a sale of Abercrombie to a private buyer might be better for shareholders who have seen the stock lose about 30 percent this year. However, in spite of the obvious profit motive, there might be some merit to examining why this shareholder went after this CEO.
Could the age of the chief executive be an issue? All companies say they have a ‘long-range strategy’, so it is fair to ask the question – ‘How long can a CEO aged 70 or above carry out a company’s ‘long-range’ strategy?’ Does long range mean five years or 10 years, and are the board and shareholders in agreement on what it means? The request for the board not to renew the contract of a 69 year-old CEO is basically a request for the board to outline its plans for the company’s future leadership. Having a well thought-out succession plan for the company’s top executives is a vital board responsibility that should not be taken lightly.
Could the current CEO’s compensation be an issue? Apparently the board approved a clause that would give Jeffries a $100 million payout if the company changes control. Such clauses can act as a deterrent to the company executing a merger that might actually benefit shareholders in the long run. The request for the board not to renew his contract could be displeasure with that aspect of his compensation (or other aspects) – especially since the company has been losing value. According to Bloomberg, Jeffries earned $41.8 million in compensation last year and 75 percent of Abercrombie shareholders voted against his pay plan at the annual meeting this summer. Few shareholders seem enthusiastic about signing up to more compensation at those levels. Boards must consider whether their compensation practices align with their shareholders’ view of what good governance should be.
Could board independence be an issue? Since the board is supposed to see itself as protecting the shareholders, if shareholders are asking the board to dump the CEO, the board must at least assess why it didn’t see the need to remove him. Clearly shareholders are not always right when it comes to management decisions, but the board must communicate better with its shareholders about the CEO’s vision and how the execution of his business strategy is going to succeed. The request for the board not to renew the contract is a request for the Abercrombie board to communicate why they truly believe in the business strategy outlined by Jeffries and how they see it benefiting shareholders in the future.
There were a lot of messages in a simple shareholder request not to renew a contract. It will be very interesting to see what message the Abercrombie board received.
