A Brand Icon in Need of Some Oversight

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Courtesy of The New York Times

Among America’s corporate leaders, there are surely few whose interests are more closely aligned with their shareholders’ than the homemaking icon Martha Stewart. She owns 26 million shares and controls nearly 90 percent of the voting rights of Martha Stewart Living Omnimedia. She’s the company’s nonexecutive chairwoman and serves on the board. Martha Stewart, the company, is inseparable from Martha Stewart, the person.

Her net worth is inextricably tied to the value of the shares. That would seem obvious to everyone except, perhaps, Ms. Stewart herself. She continues to collect lavish multimillion-dollar compensation and perks while her company teeters under the weight of huge losses, its shares trading for a fraction of their former value. The paradox is that if the stock had risen even $1 a share in recent years, Martha Stewart would be wealthier now than if she had taken only nominal compensation from the company.

“You’d think there’d be very little need for board oversight because of the strong alignment of the company’s interests with her personal wealth,” Paul Hodgson, a compensation expert and senior research associate at GMI Ratings, told me this week. “Everything should be pushing her to make sure the company succeeds. For some reason, that’s not happening.”

Last week, Ms. Stewart’s company reported a $50.7 million quarterly loss, a staggering amount considering it exceeded total revenue, which was just $43.5 million. That was a 17 percent drop from revenue in the same quarter last year. Although the loss included a $44.3 million noncash write-down related to the shrinking value of two of its magazines, the company until recently has been bleeding cash, which dropped from $38.5 million to just $17.4 million in the quarter. The company said it would lay off about 70 employees, 12 percent of its work force, and discontinue its stand-alone print version of the magazine Everyday Food.

None of this bad news has made much of a dent on Ms. Stewart’s own compensation. Her base annual pay rose from $1.7 million in 2009 to $2 million in 2010 and 2011, and she received a $3 million retention bonus when she signed her new contract in 2009. She gets an additional minimum of $2 million a year under an “intangible assets license agreement,” which gives the company the rights to “Martha Stewart’s lifestyle and the public perception of Martha Stewart’s lifestyle,” including such details as how she arranges her outdoor furniture.

Her corporate perks are well known, and she has long blurred the line between business and personal expenses. She submitted as a business expense the $17,000 cost of her now-infamous holiday trip to the Mexican luxury resort Las Ventanas al Paraiso. She arrived at the resort the day she dumped her shares in the biotechnology company ImClone upon learning, en route, that the company’s chief executive was trying to sell his shares ahead of a negative Food and Drug Administration decision on the company’s principal drug. (She settled charges of insider trading brought by the Securities and Exchange Commission after being convicted of making criminal false statements to cover up the reason for the sale.) Then she had her accountant tell her companion on the trip that she’d have to pay her “fair share” of the costs, according to testimony in her 2004 trial.

The company doesn’t break out Ms. Stewart’s reimbursed expenses, but general and administrative expenses amounted to a lofty $11 million in the last quarter. That number, of course, includes many expenses besides Ms. Stewart’s, like other executives’ salaries.

The company does reveal what it calls other compensation for Ms. Stewart, which in 2011 included a personal trainer and other expenses for personal fitness; a weekend driver; security services; fees for on-air appearances; unspecified personnel costs not otherwise reimbursed by the company; insurance premiums; and an unidentified charitable contribution, which added up to over $1 million.

Ms. Stewart also receives stock options, nearly $1.8 million worth in 2009 through 2011, though she has not received any options so far this year. Still, as Mr. Hodgson put it, “Why is she even getting stock options? Her interests are already thoroughly aligned with the company, given her ownership stake.” Moreover, the intangible license agreement “is very unusual,” Mr. Hodgson said.

All told, Ms. Stewart’s compensation was $9.8 million in 2009, $5.9 million in 2010 and $5.5 million in 2011, or $21.2 million over the last three years, even as the company was in a downward spiral. Just before Ms. Stewart got out of prison in 2005, her shares were trading at over $34 and she was a billionaire. After plunging during the financial crisis, they were above $8 a share in September 2009. They traded this week at about $2.80.

Asked about the issues raised in this column, a spokesman for Martha Stewart Living Omnimedia declined to comment and said Ms. Stewart had no comment.

Over the years, many have tried — and failed — to press this point upon Ms. Stewart. “She didn’t get it. Or perhaps she didn’t want to get it,” said one former executive, who, like other current and former employees, asked not to be named to avoid retaliation. “She wanted both. She’d say, ‘I should be paid twice what I’m being paid and the stock should be at $20. I am this company.’ “

Someone familiar with her thinking told me: “It’s fair to say that she remains very frustrated with the fact that she has a company which in her mind has the same platform as a Ralph Lauren and should be a $3 to $4 billion company and it’s not. It’s very small, and it’s shrinking.”

Ms. Stewart has sometimes blamed the board and former management. But as the controlling shareholder, Ms. Stewart largely determines the makeup of the board. After some friction over Ms. Stewart’s compensation, two highly respected directors — Jill A. Greenthal, a senior adviser at the financial management firm Blackstone, and Bradley E. Singer, a former chief financial officer for Discovery Communications — were replaced on the board. One of their replacements was Frederic Fekkai, one of Ms. Stewart’s hairdressers and a celebrity in his own right. He now serves on the compensation committee that granted Ms. Stewart her new contract. “You have to question whether these negotiations were really at arm’s length,” Mr. Hodgson said.

And even though Mr. Fekkai helps determine Ms. Stewart’s pay, the Martha Stewart Web site praises his skills and hair care products without disclosing any potential conflict of interest. “Martha loves the way Frederic Fekkai shampoo and conditioner keep her hair soft, silky and shiny,” the site says, to cite just one example. “Martha uses Frederic Fekkai Technician Color Care shampoo and conditioner.” A link provides a purchase option. A spokeswoman said Mr. Fekkai could not be reached for comment.

Ms. Stewart is so lavishly compensated, and her compensation seems so detached from the company’s performance, that the share price may not provide much discipline. “The danger is that if you have this safety net of compensation, then you really don’t care that much about the stock price,” Mr. Hodgson said. “It undercuts the alignment of her interest and the company’s. As a shareholder, you’d like to see the company get rid of all that, and then see what she does about the stock price.”

Michael Kupinski, an analyst at Noble Financial, and one of a dwindling number of analysts tracking the company, agreed. “I would have expected some cutback in terms of salary or compensation,” he said. “Taking a lower salary would boost the stock’s value.”

The one bright spot in the company’s otherwise dismal recent earnings — merchandising — has also been clouded by Ms. Stewart’s seeming insensitivity to potential conflicts of interest. Part of the increase in merchandising revenue in the most recent quarter came from a deal Ms. Stewart struck earlier this year with J. C. Penney. In return for millions of dollars in guaranteed payments, J. C. Penney plans to sell Martha Stewart-branded household products in in-house boutiques, part of a J. C. Penney turnaround strategy.

But the rival department store chain Macy’s contends that Ms. Stewart already sold exclusive rights to such products to it in a contract that extends until January 2018 — and that the contract explicitly states that “any other department store” is prohibited from selling goods in Macy’s exclusive categories. In other words, Macy’s contends that Ms. Stewart sold the same rights twice, and to one of its major competitors at that.

In a rare public dispute between ostensible partners, Macy’s sued Martha Stewart Living. A judge ruled that “a cause of action exists in favor of Macy’s” and barred Martha Stewart from selling at J. C. Penney “soft home (bedding, bath and kitchen textiles); housewares (dinnerware tabletop and gadgets); home décor (candles and frames); cookware and furniture” pending a final resolution of the lawsuit. Martha Stewart’s company said it planned to introduce Martha Stewart products in J. C. Penney early next year. (J. C. Penney is already selling products under the Emeril brand, which is owned by Martha Stewart Living.) But unless her company prevails at the trial, scheduled to begin later this month, or reaches a potentially costly settlement with Macy’s, it’s hard to figure out what Martha Stewart will be able to sell there. Macy’s and J. C. Penney declined to comment on pending litigation, and Martha Stewart Living declined to specify any products it would be able to sell if the injunction continued.

Given her prodigious talent, formidable work ethic and proven survival skills, Ms. Stewart, 71, will probably emerge from this latest crisis with her celebrity and at least some of her personal fortune intact. Is it too late for her company and her shareholders? There are at least a few positive glimmers. As part of the J. C. Penney deal, the company acquired 17 percent of Martha Stewart’s stock and was granted two seats on the board, providing some “adult supervision,” as one person close to Ms. Stewart put it. The company’s current management team — the chief executive Lisa Gersh, a co-founder of Oxygen Media, and the chief financial officer Ken West, the former chief financial officer of Marvel Entertainment, both of whom arrived last year — have helped sell their former companies and are widely admired on Wall Street. “They’re working at breakneck speed to improve profitability and enhance asset value,” Mr. Kupinski maintained, while acknowledging that the company is still far from profitable.

The wild card, as it always has been, is Martha Stewart herself. “She could hang up her pots and pans tomorrow and license her brand, and the shareholders might be better off,” the person close to her told me. “But I’m convinced she’ll be carried from her portable kitchen to her coffin. She’s not even close to the concept of retirement. She works 70 hours a week. The flaw is, she’s not a manager. She’s a brand icon. She’s a visionary. But she’s not a C.E.O.”

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