Abercrombie, Compensation, and the Need for Access (Part 3)

We are examining the Board at Abercrombie and its decisions with respect to the personal use of the aircraft by the CEO, Michael Jeffries.  In April 2010, Mr. Jeffries agreed to forego the unlimited personal use of the aircraft, accepting a cap of no more than $200,000 of personal use each year during the life of the employment contract.  In return, he received $4 million, subject to clawbacks in certain circumstances.  

We start as we always do with the notion that it is the board that has, and ought to have, the authority to detemine compensation.  Moreover, personal use of the aircraft, while often something that garners negative publicity, is merely another benefit that comes under the authority of the board grant.  Yet in order for shareholders to be confident in the integrity of the approval process, the board needs to be independent and bears the responsibility of explaining any transaction that otherwise looks unusual. 

Little about the decision was fully explained, at least in the proxy statement sent to shareholders.  With respect to the CEO's use of the corporate aircraft for personal reasons, the board originally authorized the benefit mostly for reasons of security and safety.  In the April 2010 agreement, the board limited personal use to $200,000.  The Board never explained how the concerns about CEO safety had changed.  The proxy statement merely gave as an explanation "changing compensation practices." 

Nor was there any explanation for the determination of the $4 million payment.  Moreover, the CEO still gets to use the aircraft for $200,000 a year, making the benefit worth $4.8 million.  The payment exceeded the amounts disclosed in the prior four years.  The amounts?  $639,439, $1,115,484, $656,545, and $776,723.  The four year total:  $3,188,191.  (This does not take into account the amount paid in connection with the tax gross ups.  For those amounts, see the post here). 

Admittedly, some of those prior years reflected expenses when the CEO only had the right to personal use for travel in North America, rendering the benefit less valuable.  Nonetheless, it would have been helpful to know how the amount was calculated.  The proxy statement merely stated that:  "In consideration for these modifications of the CEO’s employment agreement, the Company paid to the CEO a lump-sum cash payment of $4,000,000."

What about the system of governance?  The directors are moderately paid (around $200,000, see below) but are largely insulated from removal by shareholders.  The company has a staggered board (although it also has in place a Pfizer style majority vote requirement and recently appointed a lead director).  We have criticized these provisions in the past as ineffective. 

One of the directors, John Kessler, has been on the board since 1998, with at least a portion of that time on the compensation committee.  Based upon longevity alone, he would not be considered independent under Section A.3.1 of the Combined Code used in Britain.   Moreover, while treated as independent, the proxy statement disclosed that "Mr. Kessler’s son-in-law is on the Board of Directors of the Nationwide Children’s Hospital Foundation, and the Company has pledged a conditional donation of $1,000,000 a year for ten years (2006 to 2015) to the Nationwide Children’s Hospital, a wing of which will bear the name of the Company."

None of this establishes anything untoward about the board's approval process for such an unusual transaction.  The low level of disclosure, however, is insufficient.  The transaction further demonstrates the need for shareholder access.  Shareholder nominated directors on the board would provide greater assurance that the approval process for executive compensation is sufficiently robust to look out for their interests.  Access will facilitate this result.

Director Compensation for Fiscal 2009

Name	Fees Earned or Paid in Cash	Stock Awards	Option Awards	All other compen- sation	Total
James B. Bachmann	$107,500	$117,037	-	-	$224,537
Lauren J. Brisky	$105,000	$117,037	-	-	$222,037
Archie M. Griffin	$70,247	$117,037	-	-	$187,284
John W. Kessler	$87,390	$117,037	-	-	$204,427
Edward F. Limato	$77,500	$117,037	-	-	$194,537
Robert A. Rosholt	$92,500	$117,037	-	-	$209,537
Craig R. Stapleton	$81,532	$183,611	-	-	$265,143