This is a student assignment on Corporate Governance from Fall 2001.  It is begin presented here simply as an example of the kind of analysis that you should be looking at.  Note that this is not a recommended solution -- not everything in here is "correct."  In particular, note my comments.

10 out of 10.  Overall, the information obtained on the company, as well as the analysis is very good.  Note my comments in red, throughout.  Highlighted in green are parts from your text in order to point out the parts to which I am responding in my comments.

 The Analysis of Corporate Governance of Staples Inc.  

October 2001

 1.         The Company. 

            Staples, Inc. and subsidiaries pioneered the office products superstore concept and is a leading office products distributor, with a total of 1,307 retail stores located in the United States, Canada, the United Kingdom, Germany, the Netherlands and Portugal as of February 3, 2001. In addition, Staples has catalog, electronic commerce and contract stationer businesses.  The Standard Industrial Classification for Staples Inc. is “Retail – Miscellaneous Shopping Goods Stores.”

             Staples has four reportable segments:  North American Retail, Contract and Commercial, Staples.com, and European Operations.  The Staples’ North American Retail segment consists of the US and Canadian operating units that operate office supply stores.  The Contract and Commercial segment consists of Staples Direct, Contract, Quill Corporation and Staples Communications, which sell office products, supplies and services directly to businesses throughout the US and Canada.  The Staples.com segment includes the operations of Staples’ e-commerce businesses.  The European Operations segment consists of six operating units that operate office supply stores in the United Kingdom, Germany, the Netherlands and Portugal and sell office products and supplies directly to businesses throughout the United Kingdom and Germany.  What is the source for this information?

 2.         Officers

             According to the By-Laws of Staples Inc., the officers of the corporation shall consist of a president, a treasurer and a secretary and such other officers, including without limitation a chairman of the board of directors and one or more vice presidents, assistant treasurers and assistant secretaries, as the board of directors may from time to time determine.  Exhibit A shows the individuals at the top of the company’s governance.  The top two officers at the company are Thomas G. Stemberg (Chairman & CEO) and Ronald L. Sargent (President and Chief Operating Officer).  Both officers receive a substantial amount in restricted stock awards (to ensure that they do not sell or transfer the stock after receiving it) besides the salary.  What is the source for this information?

   

            According to the By-Laws, the officers are not required to own stock of the company.  Exhibit C shows that all executives and directors combined own less than 4% of the company’s stock, a relatively little amount.  Since they are not required to own stock, potentially this can create a conflict with the shareholders because the interests of the management are not aligned with their interests.  On the other hand, by choosing not to hold a significant amount of shares, the company’s incumbent management yields a great deal of control to large shareholders and institutional investors.  I don’t think this is true.  Most of the control of management comes from their ability to take day-to-day decisions without much oversight; this is independent of stock ownership. 

            In order for management to better represent the shareholders and maintain the “high risk – high reward” philosophy, the Board’s Compensation Committee has adopted a PARS plan (Performance Accelerated Restricted Stock Awards) for certain key executives.  Under the plan, shares of Staples RD Stock are granted to executives in consideration for services.  First, this provides an incentive for the executives to provide outstanding services in pursuit of financial rewards.  Second, by rewarding them with stock, the Board ensures that the interests of management coincide with the interest of shareholders.  The shares are “restricted” – the executives are not free to sell or transfer them until they “vest” in 2005, which provides a guarantee that the management will not easily “dispose” of common interests shared with the other shareholders.  Therefore, even though officers are not required to be shareholders, they still become shareholders. 

Very good analysis. 

The purpose of the stock options that represent the amount of $600,000 for Stemberg and Sargent, and are substantial for other key executives as well, is to provide an incentive for the management to prioritize the stockholder value maximization goal.  The company’s Proxy clearly states: 

      

Managerial Performance:

             For the 26 weeks ended 8/4/01, sales rose 5% to $4.98B. Net income fell 8% to $79.9M. Results reflect higher customer traffic in all channels, offset by a lower gross margin, & the absence of store closure credit.  (E-trade)

Explain how this is related to corporate governance. 

            In general, the company takes pride in its corporate governance system when it comes to responsiveness to shareholders’ interests and needs.  The company is followed by 14 analysts (BRIDGE) (If your purpose is to indicate the source of the information, use a footnote and give the name in full, such as Bridge Information Systems), which carries great implications for the management.  The number of analysts, which is relatively high for Staples compared to other publicly traded companies, implies that the management must prioritize shareholder’s interests by increasing the stock value by enhancing growth and earnings.  A consensus among many analysts that the forecast for earnings is not bright, or that the stock is overvalued, will cause a plunge in stock price and may lead to a retaliatory actions from stockholders, who will demand explanation from the management.  The management in this case would not be able to claim that so many analysts are wrong and will have to take responsibility and may face a prospect of being replaced.  Therefore, it is in the best interests of the management to try to have good forecasts from many analysts who follow the company.  Currently the company is doing a great job – the Wall Street consensus is “buy.”        Good.

3.         The Board of Directors                       

            According to the corporate By-Laws, the Board of Directors cannot consist of fewer than five members.  The members of the incumbent Board number sixteen; the Exhibit C shows the individuals and their affiliations.  The size of the board may be problematic in itself: Business Week, when rating the companies’ (you mean company’s – singular?  No, it looks like you mean companies – plural – in this case, you should leave off the definite article in front) Board efficiency, gave higher grades to companies that had fewer than 15 members serving on the Board because a number greater than that would restraint the Board’s efficiency and effectiveness.  However, most of the members are relatively young with the average age in the middle 50s (only one member is 71 years old), suggesting that the directors can take an active role in their work.         

Again, what’s the source? 

The Board deserves a low grade for independence from management because one of the members is CEO, Thomas G. Stemberg, and the other is President and Chief Operating Officer Ronald L. Sargent.  Having these two highest ranking corporate officers on the Board means that the board often looks after the interests of the management, not shareholders.  In addition, Mr. Stemberg also serves on the Executive Committee, which is “authorized to exercise all the powers of the Board in the management and affairs of Staples” (2001 proxy). 

Is this uncommon? 

            Some other members of the Board also hold management positions in Staples Inc.  For example, James L. Moody is a Lead Director at Staples and David G. Lubrano is a Business Consultant at Staples.  This means that there is an insider on the Corporate Governance committee as well.  These two members are not independent in their decisions because they are insiders and have an incentive to make decisions that benefit the incumbent management. 

In terms of accountability to stockholders the company deserves a high grade because under the 1990 Director Stock Option Plan, during the fiscal year ended February 3, 2001, directors were compensated exclusively through equity rather than receiving a portion of their compensation in cash (with the exception of Senator Mitchell who receives a yearly cash compensation of $75,000).  The purpose of the Director Stock Option Plan is to make the directors think more like shareholders, since they in fact become shareholders by providing their services.  However, Staples does not make stock ownership one of the eligibility requirements for the Board and every director owns less than 1% of company’s stock, with the exception of CEO, who owns 1.69%, still a considerably small amount (Exhibit B).  This year only 1 director is up for reelection, but next year 4 directors will have to be reelected, which makes them more accountable for their actions. 

All of the board members are competent in their job – most of them are CEOs and directors at other companies and have a substantial experience in the area of corporate decision making.  However, those of them who are still serving active roles in other companies (only two are retired) potentially can be a source of conflict of interest between their companies’ interests and the interests of Staples.  In addition, their duties at other firms prevent them from dedicating their time and effort to serving the shareholders of Staples.  Therefore, it is doubtful whether they can take a very active role in running the Board. 

4.         Stockholders 

            Judging by the large amount of disclosed information available about the company, it can be said that the shareholders have a large degree of control over the company.  When the company information is readily made public in a timely fashion, this means that the management acts in the interests of the public, stockholders in particular. 

            The top Institutional holder of the company stock is Fidelity Management & Research Corporation with 14.33% of the outstanding number of shares, followed by Wellington Management Company with 8.78%.   

Institution

Current Position

Net Chg in Position

Mkt. Cap

% of Outs. Shares

% of
Portfolio

Report Date

FMR CORP

66,538,659

13,653,953

1,063,953,157

14.558%

0.215%

03/31/2001

WELLINGTON MANAGEMENT CO LLP

40,797,068

4,387,900

652,345,117

8.926%

0.437%

03/31/2001

PACIFIC FINANCIAL RESEARCH INC

18,493,000

1,764,000

295,703,070

4.046%

4.736%

03/31/2001

PUTNAM INVESTMENT MANAGEMENT LLC

17,451,820

5,952,655

279,054,602

3.818%

0.134%

03/31/2001

STATE STREET CORP

9,239,306

1,271,169

147,736,503

2.021%

0.047%

03/31/2001

VANGUARD GROUP INC

7,024,122

183,184

112,315,711

1.537%

0.057%

06/30/2001

NORTHERN TRUST CORP

6,887,203

-719,192

110,126,376

1.507%

0.126%

03/31/2001

SMITH BARNEY ASSET MANAGEMENT

6,882,722

-1,251,411

110,054,725

1.506%

0.068%

03/31/2001

CAPITAL RESEARCH & MANAGEMENT CO

6,800,000

-1,350,000

108,732,000

1.488%

0.049%

03/31/2001

BEAR STEARNS ASSET MANAGEMENT INC

5,728,200

409,600

91,593,918

1.253%

1.386%

03/31/2001

 Source:  E-trade. 

Staples is not a disproportionate share of any of these institutional holders’ total assets: they are well diversified.  (What is the relevance of this comment?)  Exhibit D shows the top mutual fund holders of Staples’ stock, with Fidelity Magellan Fund leading the list with 4.80%.   

 

Compared to other companies in the same industry (how do you know this?  What’s your source?), relatively large percentage of the outstanding stock is owned by institutional investors and very small percentage is owned by the management (Executive Officers and the Board of Directors), putting the control of the company largely in the hands of shareholders, such as private and institutional investors.  Therefore, it can be concluded that the average stockholder of Staples is an institutional investor.  Is this good or bad? 

5.         Conflicts of Interest (in recent occurrences) 

A.         $50 Million Stock Buyback plan.  (Reuters) 

            Following the events of September 11th, and the following removal of buyback restrictions by SEC, Staples announced on 9/20/2001 its plan to buy back $50 Million worth of stock.  Staples said the repurchased stock will be added to the company's treasury shares and may be used for employee benefit and stock option programs, as well as other corporate programs.  (Source:  Reuters)

Equity repurchases may provide a way of increasing insider control in companies because they reduce the number of outstanding shares.  The company and its employees will end up holding larger percentage of the stock, and consequently, having greater control.  On the other hand, equity repurchasing is traditionally considered to be an action that benefits both the firm and its stockholders because stockholders benefit from resulting price appreciation, advantageous tax treatment, and the voluntary nature of surrendering the shares for cash. 

Good. 

B.         Staples Inc. Names Basil L. Anderson Vice Chairman. (Business Wire) 

            Sep 19, 2001 -- Basil L. Anderson, 56, the former chief financial officer and treasurer who helped reshape Campbell Soup Co., has joined Staples Inc. as vice chairman.  Mr. Anderson has to report directly to Ronald L. Sargent, the President of the company.  The potential problem is that Mr. Anderson serves on the Board of Directors since 1997 and is a chairman of the Audit Committee.  His appointment puts one more insider on the Board and aligns the interests of the Board more closely with the management, as opposed to shareholders.  The independence of the Board is greatly reduced by this development. 

C.        Recapitalization. (Business Wire, 10K, 10Q)  

During 1999, Staples stockholders approved a Tracking Stock Proposal which allowed the issue of new series of common stock, Staples.com Stock, intended to track the performance of e-commerce business, which operates under the name Staples.com. Staples' existing common stock was reclassified as Staples Retail and Delivery common stock ("Staples RD Stock"), intended to track the performance of Staples Retail and Delivery.  On March 15, 2001, the Board of Directors approved a proposal to seek stockholders' approval to effect a recapitalization by reclassifying the separate series of Staples.com Stock and recombine the two outstanding series of Staples' common stock into a single series representing all of Staples' businesses. At an annual meeting, the stockholders were asked to consider and approve a proposal to amend Staples' certificate of incorporation to effect the recapitalization and to rename the resulting single series of common stock as "Staples Common Stock." By integrating the catalog operation with Staples.com, Staples hopes to achieve synergies and efficiencies in how it markets to and services customers in both operations. 

Following the public announcement of the proposed reclassification, various stockholders of Staples expressed concerns that the members of the Board of Directors would benefit from the exchange of their shares of Staples.com.  On March 29th, 2001, the Board met to discuss these stockholder concerns and reached the consensus that the public must be assured that in order to preserve the highest level of integrity and good corporate governance, the Reclassification Ratio is fair to all stockholders and that any appearance of conflict of interest between the Board and the shareholders.  The Board concluded that the financial interest of the directors must be eliminated and that all directors would agree to rescind their purchases of Staples.com Stock and cancel all of their options for Staples.com stock. 

Beginning March 23, 2001, a total of 12 lawsuits were filed in Delaware Chancery Court by Staples RD stockholders against Staples and each of its directors.  The shareholders alleged that the proposed recapitalization violates Delaware General Corporation Law, staples’ contractual obligations, and the fiduciary duties of Staples’ directors.

Looks like this para should come before the sentence starting “On March 29th …” in the previous para.  Right? 

On April 1, 2001, the Board ratified the repurchase by Staples of all outstanding shares of Staples.com held by the directors at their original purchase price of $3.25 per share, without interest, and the cancellation of all options for Staples.com stock held by the directors.  Is this price too high or too low?  What was the stock price as of April 1, 2001? 

Exhibit B shows the ownership Staples RD stock and Staples.com stock by institutional investors and by the management and the Board members.  Overwhelming number of shares of Staples.com Stock was owned by the company insiders: As of June 5, senior executive officers owned 34% and the employees owned 72% of the outstanding Staples.com stock.  

            On Aug. 27, 2001 the shareholders (which shareholders?  I don’t think this refers only to Staples.com shareholders; tracking stocks don’t usually work that way.) voted to reclassify Staples.com tracking stock into Staples common stock.  The proposal passed with 85% of the vote from the shareholders.  This high rate of approval can be explained by a fact that nearly 96% of Staples.com stock was owned by the company insiders, who overwhelmingly cast the “YES” votes on reclassification.  Therefore, the recapitalization, even though approved by the shareholders, does not necessarily benefit many of them and was certainly opposed by many “outsiders.” 

Need a little more analysis of the tracking stock issue.
Also, what about bondholder-stockholder conflict?
Why is Exhibit E here?

 

EXHIBIT A  
(Source – Yahoo! Finance)

Corporate Governance

John K. Barton

 

Executive Vice President, Real Estate

Joseph G. Doody

 

President, Staples Contract and Commercial

Deborah G. Ellinger

 

Senior Vice President, Strategy

Richard R. Gentry

 

Executive Vice President, Merchandising

Shira G. Goodman

 

Executive Vice President, Marketing

Edward Harsant

 

President, North American Superstores

Susan S. Hoyt

 

Executive Vice President, Human Resources

Jacques Levy

 

President, International

Jeanne B. Lewis

 

President, Direct.com

Brian T. Light

 

Executive Vice President and Chief Information Officer

John J. Mahoney

 

Executive Vice President and Chief Administrative Officer

Lawrence J. Morse

 

President, Quill

Ronald L. Sargent

 

President and Chief Operating Officer

Thomas G. Stemberg

 

Chairman of the Board and Chief Executive Officer

Jack VanWoerkom

 

Senior Vice President, General Counsel and Secretary

Joseph S. Vassalluzzo

 

Vice Chairman


EXHIBIT B  
(Source – Company Proxy)

EXHIBIT C  
(Source – Yahoo! Finance)

Directors

Basil Anderson

 

Executive Vice President and Chief Financial Officer, Campbell Soup Co.

Arthur M. Blank

 

Retired Co-Chairman of the Board of Directors, The Home Depot, Inc.

Mary Elizabeth Burton

 

President and Chief Executive Officer, BB Capital, Inc.

George J. Mitchell

 

Former U.S. Senator, Former Majority Leader, Special Counsel Verner, Liipfert, Bernhard, McPherson & Hand

James L. Moody, Jr.

 

Retired Chairman of the Board of Hannaford Bros. Co.
Lead Director, Staples, Inc.

Rowland T. Moriarty

 

Chairman and Chief Executive Officer, Cubex Corporation

Robert C. Nakasone

 

Chief Executive Officer

W. Mitt Romney

 

Managing Director and Chief Executive Officer, Bain Capital, Inc.

Ronald L. Sargent

 

President and Chief Operating Officer, Staples, Inc.

Thomas G. Stemberg

 

Chairman of the Board and Chief Executive Officer, Staples, Inc.

Martin Trust

 

President and Chief Executive Officer of Mast Industries, Inc., a wholly-owned subsidiary of The Limited, Inc.

Paul F. Walsh

 

President and Chief Executive Officer, iDeal Partners

Margaret C. Whitman

 

President and Chief Executive Officer, eBay

Leo Kahn

 

Chairman Emeritus, Co-Founder of Staples, Inc.
Partner, United Properties Group

W. Lawrence Heisey

 

Director Emeritus, Chairman Emeritus, Harlequin Enterprises Ltd.

David G. Lubrano

 

Director Emeritus, Private Investor and Business Consultant, Staples, Inc.

 

EXHIBIT D
(Source – Yahoo! Finance)

Top Mutual Fund Holders of SPLS

 

Shares

Value

Fidelity Magellan Fund Inc

4.80%

22,300,000

$328,702,000

Janus Fund

3.95%

18,326,795

$270,136,958

Fidelity Equity-Income Fund

1.65%

7,661,538

$112,931,070

Fidelity Independence Fund

 

5,100,000

$75,174,000

Fidelity Puritan Fund Inc

 

4,555,700

$67,151,018

Vanguard Index 500 Fund

 

4,065,023

$59,918,439

Investment Company Of America

 

4,000,000

$58,960,000

Janus Strategic Value Fund

 

3,512,876

$51,779,792

College Retirement Equities Fund-Stock Account

 

3,162,468

$46,614,778

Putnam Fund For Growth And Income

 

3,020,200

$44,517,748

  

EXHIBIT E

(Source – E-trade)

Price History

Calendar Year

2000

1999

1998

1997

1996

High Price

28.75

35.94

30.79

13.39

10.06

Low Price

10.25

16.44

10.58

7.61

5.59

Year End Price

11.81

20.75

29.13

12.33

8.03

High P/E

43.17

87.23

85.53

42.91

48.81

Low P/E

15.39

39.90

29.40

24.39

27.15

Year End P/E

17.74

50.36

80.90

39.53

38.97

Dividend Yield

0.00

0.00

0.00

0.00

0.00

Growth Rates

 

1 Year

3 Years

5 Years

Sales %

19.44

23.03

28.32

EPS %

-80.48

-28.79

-8.80

Dividend %

NM

NM

NM

Revenue

Quarters

1999

2000

2001

2002

APR

1,670,611

2,072,066

2,555,786

2,667,076

JUL

1,475,705

1,840,110

2,201,297

2,314,229

OCT

1,899,770

2,393,811

2,801,769

 

JAN

2,077,103

2,630,822

3,114,819

 

 

Totals

7,123,189

8,936,809

10,673,671

4,981,305

Note:  Units in Thousands of U.S. Dollars

 

Earnings Per Share

Quarters

1999

2000

2001

2002

APR

0.078

0.110

0.090

0.090

JUL

0.020

0.110

0.090

0.090

OCT

0.150

0.200

0.190

 

JAN

0.150

0.260

-0.240

 

 

Totals

0.398

0.680

0.130

0.180

Note:  Units in U.S. Dollars