Question

Case Study #11—Martha Stewart Read the Martha Stewart case study located in the section titled Case Studies in your textbook concerning the following situation: This case focuses on the corporate governance aspect of Martha Stewart Living Omnimedia (MSO), a media empire founded by Martha Stewart. Stewart is a former model and devoted her career to domestic perfection and luxury. She is the brand icon of MSO; however, with new technology and the shift of consumer tastes and preferences, MSO’s business model is receiving serious threats from other competitors. After a review of the history of Martha Stewart Living Omnimedia, the case discusses its competition, the legal problem that Martha Stewart encountered, changing leadership within MSO, Martha Stewart’s questionable compensation, and the future of MSO. The case concludes with a discussion of MSO’s future at a crossroads.

The case underscores the importance of corporate governance when conditions in the environment change. An analysis of the separation of ownership and managerial control, board of directors, and executive compensation will aid in evaluating the future of MSO. Some analysts suggest that MSO will lose its competitiveness once Martha Stewart leaves the company; others suggest that the MSO brand has lost its brand image by going into product lines such as cleaning fluids and dog poop bags. Also, a few analysts suggest that MSO is a potential takeover target.

This case is ideal for demonstrating the importance of corporate governance. The following points are to guide a review and discussion of some important concepts.

Discuss MSO’s corporate governance. Has the company been able to separate the ownership and managerial control?

Evaluate the effectiveness of MSO’s board of directors. Have the directors been able to monitor and control the company?

Executive compensation is a method of governance mechanisms. Discuss Martha Stewart’s compensation and evaluate its effectiveness.

Is MSO in financial trouble? Discuss the possibility of the market for corporate control. Will MSO become a takeover target?

Describe MSOs next move in terms of growth and expansion. Provide an analysis, of what additional recommendations would be required to be done to help MSO achieve its goals?

Evaluate MSO’s international strategy and its use of alliances to achieve company objectives, what would be their best strategy?

Answer 1

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Governance refers specifically to the set of rules, controls, policies and resolutions put in place to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who indirectly affect governance, but these are not examples of governance itself. The board of directors is pivotal in governance, and it can have major ramifications for equity valuation.

Communicating a firm's corporate governance is a key component of community and investor relations. On Apple's investor relations site, for example, the firm outlines its leadership and governance, including its executive team, its board of directors and also the firm's committee charters and governance documents, such as bylaws, stock ownership guidelines and Apple's articles of incorporation.

The need for constructive board evaluation is now recognised as an essential component of good governance practices in order to enhance board effectiveness. In addition to customary board self-evaluations, more regulators are introducing requirements for periodic external evaluations. These new obligations, however, lack specific standards and guidelines, leaving many directors guessing as to the most appropriate processes to undertake.

To address the weaknesses inherent in self-evaluations, jurisdictional regulators are increasingly introducing the requirement for periodic external board evaluations. Experienced third-party evaluators complement internal efforts by introducing an objective perspective and additional resources and by contributing specialised skills and knowledge of best practices. They can also provide standards and structure to provide greater rigour to the process. As well, external evaluators offer opportunities to benchmark with other organisations.

us more regulators are setting out expectations for more evaluations – both internal and external. They expect to be able to determine whether the effectiveness of the board was assessed at an appropriate level and for the board to demonstrate who did what, where, when and how. Since there is little direct guidance from regulators regarding how these assessments should be conducted, the following leading practices may be helpful for directors to consider:

Establish clear goals, scope, approach and timeline for the evaluation.

Ensure that all board members: (i) agree on the scope of the evaluation (i.e., directors, committees, committee chairs, overall board); (ii) are committed to the process and how it will be carried out (e.g., observation, discussions, questionnaires, interviews, document analysis); and (iii) agree on the elements to be examined (e.g., agendas, meetings, information flow, performance of committees, board-management relationship, approach to governance, risk, strategy).

For external evaluations: (i) schedule an evaluation a minimum of every three years; (ii) ensure the independence of the external evaluator, i.e., no ongoing or recent relationship with the organisation; and (iii) ensure the evaluator has the necessary expertise, especially knowledge of current governance practices and experience conducting board evaluations for similar organisations.

Include in the evaluation: (i) feedback of appropriate senior executives in order to assess the board’s relationship with management; (ii) evaluation of individual directors; (iii) composition and performance of key committees (e.g., nominating, audit, risk, compensation) to assess essential board functions; (iv) insights from multiple stakeholder perspectives; (v) benchmarking against standards and practices of comparable organisations; and (vi) actionable recommendations.

The board should also provide rigorous documentation to support the completeness of the evaluation process, results of the evaluation and plans to address the results. Directors must also act on these results and document the actions taken.

Never before have boards been subject to such intense performance scrutiny. However, while evaluations may seem to be an additional burden amid myriad other new regulatory requirements, they also represent opportunities for enrichment on multiple levels. For example, evaluations enable boards of directors to enhance team-building, strengthen decision-making capabilities and the board-management relationship, to refine strategic focus and address skills gaps.

These evaluations also present opportunities for boards to strengthen the organisations they oversee. Evaluations help to clarify goals and priorities and reinforce ethical tone and culture.

Such evaluations are also an opportunity to strengthen stakeholder relationships. By participating in these evaluations, boards enhance corporate reputation by demonstrating their commitment to governance excellence and building trust and accountability.

Requirements for board evaluations are expected to elevate on a global scale. As this trend continues, directors should keep in mind that evaluations are only as effective as the process. No board wants to face angry shareholders or proxy advisory firms questioning its governance capabilities. By adopting best practice evaluation strategies, directors can be prepared for the most demanding scrutiny by regulators or stakeholders.