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Source: The New York Times | Fair Game, August 19, 2016 column


Business Day

Bloated Pay Came Before Hain Celestial’s Error

Fair Game


The Hain Celestial Group is a maker of natural and organic foods and beverages.

The Hain Celestial Group, via PR Newswire



The Hain Celestial Group is a maker of natural and organic foods and beverages. Credit The Hain Celestial Group, via PR Newswire

The Hain Celestial Group, a maker of natural and organic foods and beverages, has been riding high in the market. But on Monday it came crashing to earth when it disclosed an accounting problem, delayed its full-year financial report and said it probably wouldn’t meet its earnings guidance for 2016.

Investors have dumped shares in the company, based in Long Island, wiping out $1.5 billion in market capitalization.

The problem, Hain said, was that it might have improperly recognized revenue from certain distributors in the United States during an unspecified period. The company, which says its purpose is “to create and inspire a healthier way of life,” may have mistakenly recorded revenue when it shipped products to the distributors, rather than waiting until those goods had been sold to consumers.

Not the most transparent disclosure in history, that’s for sure.

Hain said it did not expect the accounting problem to have an impact on the total amount of revenue the company had recognized, but it said it was assessing its internal controls over financial reporting.

Clearly, investors were stunned by Hain’s statement. Maybe they shouldn’t have been.


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According to corporate governance experts, clues to oversight problems at Hain have been evident for a while in its excessive executive pay practices and disdain for shareholders’ anger about them.

“When you see overcompensation, it’s usually indicative of failure in other areas,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance. “Compensation is oversight. It’s a picture window into the boardroom because it’s such an important issue.”

Hain is led by Irwin D. Simon, who founded the company in 1993 after stints at the SlimFast Foods Company and Häagen-Dazs, the ice cream maker. He wears three hats at Hain: president, chief executive and chairman of the board.

For a founder, Mr. Simon does not own that many shares of Hain. As of February, he held 1.9 million shares, or 1.8 percent of its stock outstanding. Those holdings are worth about $74 million at current prices.

Unlike some company founders, who eschew high pay, he has enjoyed hefty remuneration that comes from shareholders. Over the most recent three years — fiscal 2013-15 — he has received an average of $18.1 million in annual compensation.

That is a bounty for a company of Hain’s size, which reached $2.7 billion in sales for the most recent fiscal year.

What is more, many of Hain’s shareholders have expressed their displeasure with the compensation, voting in nonbinding resolutions against the company’s pay practices in higher numbers with each passing year. In 2012, for example, 30.9 percent of votes cast at Hain’s annual meeting were nos. By 2015, this figure had risen to a staggering 59 percent.

This is a striking contrast to the 5 percent median nay vote tallied at all 500 companies in the Standard & Poor’s index this year.

Mary Celeste Anthes, a Hain spokeswoman, said in a statement:

Hain Celestial is committed to delivering value to all of our stakeholders and has created significant value for our stockholders over time. We have a very strong, experienced and highly independent board that exercises its oversight role with great care and diligence as evidenced by the fact that we self-identified and have begun to review the potential accounting issue through our internal examination and the oversight process led by the audit committee and independent external counsel.”

Among Hain’s institutional holders that have voted against its pay is Vanguard, the company’s second-largest holder. By contrast, BlackRock, Hain’s biggest shareholder, voted its investors’ shares in support of Hain’s compensation at the 2014 annual meeting, the most recent year for which a breakdown by shareholders is available.

Last year, the company tweaked its compensation in response to the shareholder fury. Hain said it would extend the pro-rata vesting period for restricted stock grants to three years from two, increase the proportion of equity compensation to cash and “seek to eliminate” the double dip in pay that resulted from its use of identical performance metrics in two incentive plans.

Judging by the numbers, Hain shareholders viewed these changes as too little, too late. After they were announced, the company received its highest negative vote on pay.

“Obviously, their compensation consultant told them to give investors a few things,” Mr. Elson said. “The fact that they’re now listening, albeit a little bit, is a good thing. But when you get into high double digits on pay votes, a board that ignores that is making a terrible mistake.”

The pay of Hain’s chief hit my radar screen three years ago when Equilar, a compensation analysis firm in Redwood City, Calif., identified problems with the peer groups the company used for pay purposes.

Many companies benchmark their pay against a group of companies in their industries. Most of Hain’s chosen peers had higher revenue than the company and half had larger market capitalizations, Equilar found. After Hain tilted the playing field in its favor, Mr. Simon received far more than the median pay awarded to chief executives at those larger peers.

Ms. Anthes said the company’s changes to its pay programs were made in consultation with its stockholders and corporate governance experts; the modifications “respond to their input and clearly align pay with performance,” she added.

It is unclear when Hain will produce its full-year financial results. Having identified the accounting error, it said it would issue its scrubbed report as soon as possible.

But the accounting problem isn’t likely to improve its relationship with shareholders. Their anger may boil over at its as-yet-unscheduled annual meeting this fall.

Even before Hain’s recent problems, three of its directors came under fire from shareholders. They are the members of its compensation committee: Richard C. Berke, a former executive at Broadridge Financial Solutions, an outsourcing provider; Scott M. O’Neil, chief executive of the Philadelphia 76ers and the New Jersey Devils; and Adrianne Shapira, chief financial officer of David Yurman Enterprises, a designer jewelry maker, and a former equity research analyst at Goldman Sachs.

At last year’s meeting in November, more than one-third of the votes cast withheld support for the three directors. That kind of dissent is rare in the boardroom.

Through the Hain spokeswoman, the directors declined to comment.

Hain characterizes itself in its filings as a leader in corporate governance that has “consistently demonstrated our longstanding willingness to listen and respond to our stockholders’ concerns.” Really?

Shareholders of United States companies are a pretty easygoing bunch most of the time. It typically takes a lot to get them agitated. But when they do protest, corporate board members should know better than to ignore them.


A version of this article appears in print on August 21, 2016, on page BU1 of the New York edition with the headline: Bloated Pay Came Before Hain’s Error.


© 2016 The New York Times Company

Performance and Shareholder Support

The following graphs of corporate performance and of shareholder voting support for executive compensation are presented for the company addressed in the article with relevant market comparisons.

Full-size graphs of these and other companies you may select can be generated on the Shareholder Forum's websites for Returns on Corporate Capital™  and for Shareholder Support Rankings™. Definitions of both analyses are presented below.

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Returns on Corporate Capital™ are a performance measurement developed in a Shareholder Forum workshop project, and are calculated from the company’s SEC reports of its GAAP-defined net income plus interest expense and income taxes, divided by its prior year’s ending balance of total assets less current liabilities other than interest-bearing debt. Comparative averages for the company's industry are based on aggregate amounts for all reporting Russell 3000 companies in the six-digit Global Industry Classification Standard (GICS), excluding the amounts for the subject company.

Shareholder Support Rankings™ analyses are produced by The Shareholder Forum from research data provided by Equilar, Inc., calculated as the percentage of total votes cast for, against and abstaining in advisory “Say on Pay” shareholder approvals of executive compensation.

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