It is not unusual for large American public companies to be controlled by a founder, a founding family or a corporation that bought out the large majority of shareholders at some time in the past. In the case of all of these companies, the shareholder should not be fooled into thinking anyone other than the controlling shareholder ultimately decides who runs the company and how. The chief executives on the “Least Powerful CEOs in America” list serve at the whim of controlling shareholders, regardless of how well or how poorly they do for the company’s other shareholders.
Most of the companies with a controlling shareholder are ones in which the founder or founding family had all of the ownership before the company became public. In some cases these founders kept all voting shares for themselves at the time of the initial public offering. In other cases, they kept enough to still have much larger stakes than any other holders. The best example of the evolution from owning all of a company to owning voting control is Walmart (NYSE: WMT). Sam Walton founded the company. He kept the controlling block of shares when it went public. His family retained control after his death and still does.
The fact that a CEO can be dismissed for reasons other than performance does not appear to affect how well these chief executives do. Current Walmart CEO Michael Duke may be the worst chief executive in the retailer’s history, but so far he retains the support of the founder’s family. The Mexico bribery scandal that Walmart faces will cost shareholders money, probably in the form of large legal fees and perhaps government fines. Walmart’s stock has fallen recently due to investor concerns. Duke has been a poor steward. At the other end of the spectrum is Fabrizio Freda, who runs Estee Lauder (NYSE: EL). The company set a record for both profits and revenue last year. Shares are up 100% in just two years. Still, nothing would keep the Lauder family from dismissing Freda — should they choose to — despite those successes.
24/7 Wall St. reviewed the corporate structure, governance and voting rights of the 500 largest companies by market cap. Based on a review of company proxies, we identified those companies in which someone other than the CEO had voting control of the company. We then limited the universe to those companies with market cap in excess of $5 billion.
> Name: Michael Duke (Age: 62)
> Title: Chief Executive
> Controlling Shareholder: The Walton family
> Controlling Block: The 49.5% of “direct” and “indirect” voting shares
Michael Duke is in enough trouble already. He has only been Walmart’s CEO since early 2009, when the company pushed out H. Lee Scott, Jr., who is still on the board. Over the past two weeks, a huge bribery scandal at the corporation’s Mexico operations has begun to threaten the company’s image. The scandal may make it harder for the world’s largest retailer to do business in several countries, including the United States. Walmart has begun to move into large cities, a move local retailers often resist. The Mexico scandal will give these smaller retailers more firepower as they lobby local government. A number of shareholders and activist groups have called for Duke and Walmart chairman S. Robson Walton to step down. Walton can resist the requests because of his family’s control of the corporation. Duke is a likely candidate to be sacrificed because he allegedly knew about the trouble in Mexico. Walmart’s CEO is among the most visible in the world. The retailer employs 2.2 million people around the world and is one of its largest companies based on revenue, which should reach $450 billion this year. Even if Duke is forced to leave, he has had some good years financially. His compensation in each of the past three fiscal years has been more than $18 million.
> Name: Mark G. Parker (Age: 56)
> Title: Chief Executive
> Controlling Shareholder: Philip Knight, founder and chairman
> Controlling Block: 74.6% of Class A, 17.8% of Class B
Mark Parker, 55, has been the CEO of Nike (NYSE: NKE) since 2006. Philip Knight, the company’s founder and board member since 1968, must like what Parker has accomplished because Knight has voting control of the company. Since Parker took over, annual revenue has gone from $15 billion to $20.8 billion. Net income has increased from $1.4 billion to $2.1 billion. Nike’s share price has risen more than 150% over the same period. It has continued to consolidate its position at the top of the sports apparel and footwear market in the past half decade. Well-regarded research firm Morningstar recently wrote: “Nike remains the largest and most dominant player in the athletic footwear and apparel category, which it has helped revolutionize during the last 40 years.” Parker has only been paid modestly to run a company with sales as large as Nike’s. He made $11.3 million last year and $13.2 million in 2010. The importance of Knight’s holdings is indicated in Nike’s 10-K filed with the SEC: “The sale of a large number of shares held by our Chairman could depress the market price of our common stock.” Nike has 485 million shares outstanding.
3. Dish Network
> Name: Joseph P. Clayton (Age: 62)
> Title: Director, President, and Chief Executive
> Controlling Shareholder: Charles W. Ergen
> Controlling Block: 98.2% of Class B common
Charles Ergen cofounded Dish Network (NASDAQ: DISH) with his wife, Cantey Ergen, and James DeFranco, in 1980. Together they own a 98% controlling block. Joseph Clayton, who has been the company’s CEO since mid-2011, is an industry veteran. He was paid $9.8 million for the year. Clayton has been chairman of Sirius XM (NASDAQ: SIRI) and sat on the board of directors of EchoStar (NASDAQ: SATS). Like cable, satellite television was introduced in the 1980s as an alternative to major TV network programming. Dish and DirecTV (NASDAQ: DTV) have been the two successes that emerged from 30 years of company launches, failures and mergers. The Dish subscriber count is currently just short of 14 million. The key to success in the industry has been breadth of programming. Dish has 230 basic video channels, a large number of premium sports and movie packages, and more than 3,000 local channels. Clayton appears to be the right choice to run the company at the right time. His background in satellite delivery and content acquisition is essential to the video-program-to-the-home industry, which has become extremely crowded in the past five years. Both the large telephone companies and startups like Netflix (NASDAQ: NFLX) compete directly now with the cable and satellite incumbents.
> Name: Philippe P. Dauman (Age: 58)
> Title: President and Chief Executive
> Controlling Shareholder: Sumner Redstone, executive chairman
> Controlling Block: 79.5% of Class A common
Sumner Redstone has fired several well-regarded CEOs. These include Frank Biondi, who ran Viacom (NASDAQ: VIAB) until 1996, and Thomas Freston, who was CEO until 2006. Shortly before he sacked Feston, Redstone said, “I, for one, am very encouraged by the progress we have made financially and operationally, particularly in moving our powerful brands to promising new platforms.” He added, “The way Tom and I look at it, at least for the time being, we like the company exactly as it is.” It is good to be the king. If current CEO Philippe Dauman loses his job, he will leave Viacom as a very rich man. His total compensation in 2011 was $43.1 million in 2011 and $84.5 million in 2010. He was one of the highest paid public company CEOs in each year. Given Redstone’s position, he must have blessed those packages. Based on share price performance, Dauman can claim he is due at least part of the bounty. Viacom shares are up 30% over the past two years. Shareholders have been told that the buyer should beware of how Viacom is controlled. The company’s SEC filings list this control as a “risk factor.” Through National Amusements and its affiliates,which Redstone owns, he controls 80% of the Viacom Class A shares. “NAI’s voting control of us allows it to control the outcome of corporate actions that require stockholder approval, including the election of directors and transactions involving a change in control” according to the company’s 10-K filing.
5. Sears Holdings
> Name: Louis J. D’Ambrosio (Age: 48)
> Title: Chief Executive
> Controlling Shareholder: Edward S. Lampert, chairman of the board
> Controlling Block: 61.0% of common stock
Ed Lampert engineered the merger of Sears and Kmart in 2005. The financial results have been a disaster most years since then. Lampert may finally have picked a long-term CEO to turn the company around after several efforts. Louis D’Ambrosio was appointed CEO in February 2011. It took a long time for Lampert to make his decision. Interim chief executive W. Bruce Johnson held the job from early 2008 until D’Ambrosio joined, at which point Johnson was demoted. Lampert and his management have not been able to create a formula that draws shoppers from large department stores and big-box retailers like Walmart and Target (NYSE: TGT). Consequently, same-store sales at Sears and Kmart drop most months. The two brands also have only modest presences online compared to the leaders Amazon.com (NASDAQ: AMZN) and walmart.com. These failures to draw both brick-and-mortar as well as Internet consumers has caused analysts to believe that Sears Holdings (NASDAQ: SHLD) is too far gone to turn around. If D’Ambrosio is pushed out by Lampert, he has the comfort of having made $9.9 million in 2011. Sears characterizes Lampert’s power in its SEC filings as follows: “Affiliates of our Chairman, whose interests may be different than your interests, exert substantial influence over our Company.”
6. Estee Lauder
> Name: Fabrizio Freda (Age: 55)
> Title: President and Chief Executive
> Controlling Shareholder: Ronald S. Lauder, chairman emeritus, directly and through a series of trusts
> Controlling Block: 51.6% of voting power
Ronald Lauder ran the family’s cosmetics business as CEO from 1982 through 1999. He joined the company in 1958. Estee Lauder was started by his mother and his father, Joseph, in 1935. Fabrizio Freda has been paid well to run Estee Lauder since he became its most recent CEO in 2009. He made $21.4 million in 2011. But Freda can make a good case to his boss and to shareholders that he has done a good job regardless of who actually employs him. Shares in Estee Lauder have risen close to 100% in the past two years. The company had record revenue of $8.8 billion in fiscal 2011 and record net income of over $700 million. Estee Lauder is an example of a company that has done exceedingly well for shareholders despite them not having a voting stake in the company. In its last 10-K filing to the SEC, the company said about its voting power: “We are controlled by the Lauder family.”
Douglas A. McIntyre