Avon's New CEO Seems To Actually Want To Work For Her Paycheck

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This thing about new Avon CEO Sheri McCoy is sort of a good corporate-governance-exam question. You're the board of a public company. You've got a cash offer on the table from a rival but blah blah blah opportunistic offer doesn't reflect fundamental value and standalone prospects and contingent etc. etc., all of which is more plausible than it usually is. Also you need a new CEO. For some reason, CEOs who could plausibly run your business independently don't like to be hired to just do three months of work and then be kicked out with just their $1.9mm signing bonus and $1.2mm base salary, so to lure a good CEO you need some sort of promise of independence.* How do you make promises in business? With money of course! So you say something along the lines of "no, really, we're not going to sell out and leave you high and dry, and to prove it we will pay you three years' worth of salary and bonus on a change of control, which is (a) more than our change in control policy generally provides because these are special times what with a hostile bid actually being on the table, (b) $9mm in cash salary and bonus plus it looks to me like $7.2mm of LTIP awards** so y'know that's kind of a lot, and (c) objectively better than working for three years to get paid the same amount of money, right?"

But here's the thing: let's say Coty comes back tomorrow and offers a 150% premium, minimal-diligence, all-cash bid for AVP. What do you do now, as a board? Well, if you do sell, then your new CEO cashes out that payment that you just got done telling her was vastly more attractive than actually working at Avon for three years. And this is a bit of a problem because hey remember how every merger ends up getting everyone involved sued for conflicts of interest? Remember how that Goldman banker got scolded for a conflict of interest where he indirectly owned $340k of bidder stock in his PA and that stock might go up slightly if the bidder underpaid? Well here accepting pretty much any bid from Coty makes Sheri McCoy $9mm+ of pretty much free money, which seems like a bigger conflict than that.

Of course, CEOs sell companies and cash out their golden parachutes all the time, and plaintiffs' lawyers whine about it all the time and rarely get anywhere, but those CEOs typically weren't hired with a bigger-than-policy golden parachute while the merger offer was on the table. That set of facts, I suspect, would be helpful to an enterprising plaintiffs' lawyer in pushing up the price of a settlement. (Remember: all of these cases settle.) Which is stupid! Because it seems like McCoy's golden parachute was actually intended to do what it did: to convince a respected executive who wants to and can actually run the business independently to come join a company that is in play.

I guess I'd be complaining if I were a shareholder who wanted Avon sold. There was an amusing case a while back where a board was sued for issuing bonds that made it more likely to be sued if it got taken over by activists. (That is a highly stylized description but whatever, the case, and the solution the company came to, are sort of interesting if you're an indenture nerd.) This parachute strikes me as a lower-key version of the same thing: by creating a somewhat silly appearance of conflict for its CEO, Avon has actually made it a bit harder for her and, more importantly, for its board to agree to a takeover. Perhaps that difficulty will help them negotiate a better deal with Coty; perhaps it will keep them from negotiating altogether. But generally speaking investors can't really sue you for not doing a merger - only for doing one that they don't like. Which I guess makes this a pretty effective promise from the board to McCoy that they won't be selling the company out from under her.

Avon 8-K [EDGAR]
Avon’s New CEO Get’s Sweetened Change In Control Clause [Deal Journal]

* Isn't that weird btw? I'm definitely the sort who'd prefer to do three months of work and then cash out with my barely-earned signing bonus, which I guess is why I don't run a public company. In general there are a lot of jobs in the financial world where the people who take them are all "ehhhhh, I'm not so sure about this," and I just want to say "I WILL DO IT FOR CHEAP." I know it sucks to be a corporate director these days what with SOX and increased scrutiny and more shareholder lawsuits, but if you want me on your board, I'm in, seriously, "pseudo-financial blogger" looks awesome in a proxy statement. You want me to be the CEO of a struggling company that is just trying to sell itself, and after it's sold I'll be unemployable? Done. I'm unemployable now.

** She gets $1.2mm/year in base, 150% target cash bonus, and LTIP (70% RSUs and 30% cash) "with an annual target award equal to 600% of base salary, subject to achievement of performance goals." Under the change in control policy, as modified by her contract, she gets three years' salary and bonus on a no-cause termination after a change in control, but it looks to me like the LTIP isn't tripled.

Related

Shareholders Seem Unfazed By Evildoing In Kinder Morgan - El Paso Deal

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