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Avon's Corporate Governance Strengthens

October 10, 2012 | About:

Avon Products Inc. (NYSE:AVP)’s embattled former CEO Andrea Jung said she’ll step down as board chairman on Dec. 31. The beauty company has taken several such moves toward restoring its credibility in recent months and now has stronger corporate governance.

While serving as both chairman and CEO, Jung came under fire for problems ranging from Avon’s underperforming stock price to its overseas bribery investigation, which we had discussed here. In December 2011 Avon announced Jung’s loss of the CEO title and said she would enter into a two-year employment contract.

But then, after announcing its appointment of Sheri McCoy as its new CEO and board director in April, Avon on Oct. 5 said Jung will no longer act as board chairman while instead continuing as a senior adviser to the board beginning Jan. 1, 2013. Fred Hassan, who has served since February 2009 as Avon’s lead independent director, will assume Jung’s position of non-executive board chairman on Jan. 1.

Jung’s fall is a marked departure from the past. In an indication that her managers had previously allowed her too much freedom, she earned above $10.1 million in 2011, disproportionately more than Avon’s other named officers who all earned less than $5 million each that year. Clearly, the separation of Jung’s dual roles as board chairman and CEO is positive, as it means McCoy will not be her own supervisor and the balance of power among Avon’s senior ranks makes more sense now.

That isn’t the only positive change that Avon made recently. The company’s proxy statement filed this April shows that Avon changed its compensation policies in 2011, so that named executive officers now receive performance-based restricted stock units rather than stock options that simply vest over time regardless of what the managers do. Avon’s senior officers did not receive salary increases in 2011, and CEO stock ownership guidelines increased from five to six times base salary, among other things. Such moves suggest that Avon is now acting more in the best interest of its shareholders rather than of its managers.

Due in part to the recent disappearance of red flags about CEO compensation along with other issues, Avon’s financial data now results in an Accounting and Governance Risk (AGR ®) score of 69, indicating that Avon has higher risk than only 31% of comparable companies. Avon’s AGR score has reflected average risk since December, whereas in the quarters ended in June and September 2011, the score had indicated that Avon was accounting for its finances relatively aggressively rather than in a conservative light.

The improved AGR score seems unsurprising, given that Avon has made its management accountable for mistakes and thus motivated them not to neglect the law. The company’s former interim CFO and developed market group vice chairman Charles W. Cramb left Avon this January in connection with its overseas bribery investigation. While it seems obvious that companies should remove the people in charge in such circumstances, it doesn’t always happen.

That said, Avon’s recent improvements do not make the company problem free. For example, 30% of Avon’s long-term incentives for named executive officers will now be payable in cash, which does nothing to tie these managers’ performance with long-term shareholder equity value.

Meanwhile the jury remains out on Avon’s many new managers. In September alone, for example, Avon announced that Scott [url=http://investor.avoncompany.com/phoenix.zhtml?c=90402&p=irol-newsArticle&ID=1731351&highlight= in]Crum[/url] became its senior vice president of human resources and chief people officer, Charles H. Noski its new board member, and Jeff Benjamin its senior vice president and general counsel. Only time can tell how these people will navigate Avon past its travails, but at least they’re out of the gates now with a cleaner slate.

Rating: 3.4/5 (8 votes)


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