Who Is at Fault at Avon?

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Avon’s (NYSE: AVP) vice chairman, Charles Cramb, was fired as the federal government examines whether the company violated the Foreign Corrupt Practices Act. He may have known about bribes Avon made outside the U.S. The government also has probed whether Avon management selectively disclosed financial information to a Wall St. analyst. And Avon’s CEO, Andrea Jung, will lose that job, but remain executive chairman. Two former CEOs of the company vocally objected to the action because they believe that new management is necessary to lead the troubled company.

Who is at fault as these issues and, most importantly, the issue of Avon’s financial performance, which has undermined the firm’s stock price and reputation? The board of directors.

The Avon board is an odd mix of people, some of whom are hardly qualified to sit in their positions. The board’s lead director, Fred Hassan, who should have been at the forefront of solving Avon’s management problems, has been much too slow in carrying out his duties. He has been a director as long as Jung has been CEO. He has been in a position to watch all of the firm’s troubles unfold and did nothing until he and others forced Jung out.

Maria Lagomasino, a private banker, has been on Avon’s board since 2000. It is hard to see how someone with her background has any reason to be involved with governance at a large public company. Don Cornwell has been on the board since 2002. He is a former radio executive. Paul Pressler, who was dismissed as the CEO of Gap (NYSE: GPS), is also on the board. His turn as the head of a public retail firm ended badly.

There are few precedents of public boards that have been dysfunctional as long as Avon’s. The best example may be Hewlett-Packard (NYSE: HPQ), where the board stumbled and bumbled for years. The tech company hired former eBay (NASDAQ: EBAY) CEO Meg Whitman. Many of the HP board members have left recently. The pressure for them to do so has existed for some time. It is remarkable that the board took so long to do what it should have long ago — bring in appropriately experienced directors.

The changes in Avon management have not been accompanied by changes on the board. Until they are, the reasons to trust that the company’s many problems can be fixed are nonexistent.

Douglas A. McIntyre