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Pundit’s Mailbag — After Avocadogate,
A Closer Look At Boards Of Directors

We first discussed the issues surrounding the allegations of financial improprieties at the California Avocado Commission with a piece titled, Audit Of California Avocado Commission Raises Questions Of Use Of Funds And Governance Policies.

This was quickly followed with Pundit’s Mailbag — Lesson From Avocadogate: You Get What You Tolerate, in which we compared the situation of Mark Affleck of the California Avocado Commission to that of Dick Grasso from The New York Stock Exchange and Dennis Kozlowski of Tyco:

What do we think unites the Grasso and Kozlowski case with Mark Affleck’s case?

What really happened in both the Grasso and Kozlowski case was that the respective boards of directors thought these players were invaluable. They had both been phenomenally successful in building their respective organizations and, in both cases, the boards of directors were content for them to have whatever kind of compensation they wanted, to run whatever kinds of offices they wanted and, in general, to allow them to run the show as long as they kept producing results.

Maybe every “T” wasn’t crossed and every “I” wasn’t dotted, but that was the gist of it. It was only later when the board members realized that they had fiduciary responsibilities to shareholders and might be personally liable for their failure to supervise and that their own reputations could be sullied in the matter that, all the sudden, these much beloved CEOs became bad guys.

So, what seems to have happened here was that the board — or at least some key members of the board — were not choosing to look. Mark Affleck was a hero; he had built what was commonly perceived as one of the most effective commodity promotion groups in the country. Consumption and prices had risen over long periods of time, and events, such as the admission of foreign avocados into the US that were once perceived as disasters, were managed without too many problems. If he needed an extra $25,000 a year, nobody was going to risk losing him over such an issue. And if he felt that he had to offer his staff extra benefits, so be it.

The problem seems to have been two-fold. First, although certain board members seem to have accepted this perspective, not all of them did and, certainly, not all avocado growers did. So the commission started talking out of both sides of its mouth. The growers were being told there was a salary freeze, while Mark had the flexibility to give compensation in other ways. Second, whatever flexibility Mark was given, he still had the responsibility to follow the tax laws.

These pieces led to several letters. One from a man at the epicenter of all the controversy:

I have enjoyed your writing from the moment I started reading the Perishable Pundit.

I have learned much about the business, and from the incisive way you cut to the heart of matters in the produce world.

It is unfortunate to say that you are no less correct, nor any less incisive, when you turn the focus on my own industry.

Your column rings very true when you begin to explore how the Avocado Commission got to where it is today.

Add to the mix only nine board meetings per year, and the abolishment of committees by a previous chair, you have the perfect recipe for what happened.

Rick Shade
California Avocado Commission
Irvine, California

We appreciate the kind words about the Pundit and have to commend Rick for being a stand-up guy willing to confront these issues forthrightly. There is an enormous tendency in these circumstances to try and hide. It never works and only leads to wild speculation. Whatever happened in the past, Rick and the board have been very forthright in dealing with this matter and deserve a great deal of credit for that.

Not only have they had to deal with difficult questions from the state, from the media and from their fellow growers but they have had to try to make delicate distinctions that the auditors did not.

For example, there is this whole section in the audit on tickets to sporting events and it seems to paint with a broad brush claiming abuse. Yet, many companies in the industry have season tickets to sporting events and they attend games with customers. If they can’t find a customer, they typically offer the tickets to staffers and their family members.

Now according to IRS Code it is probably true that a company can’t give its employees tickets without reporting it as income, but it is widely done — we would say it is done almost to the point of being customary and not what most in the industry would consider abuse.

Yet, that doesn’t mean there was no abuse. Were more tickets ordered than could reasonably be expected to be used with customers? Was a genuine effort made to find customers to take to the games? If there were extra tickets, were they given out generously to inspire all the people in the organization? Or did the top executive hoard the tickets for his personal pleasure?

As much as anything, what the audit portrays is a complete lack of internal controls so nobody can really answer any of these kinds of questions in a reliable and believable way. So innuendo just hangs there and people will come to assume the worst.

We are sure the Avocado Commission will right itself as people like Rick Shade are dedicated to making it happen.

We hope that the industry as a whole will use this occasion as a “learning moment” to realize that invitations to serve on boards of directors are not merely honors, they carry legal responsibilities. One industry executive who has served as Chairman of many associations and boards sent this note along:

Regarding Mark Affleck, I have to tell you I am conflicted. I read the full audit report, and there were clearly some things that were happening that weren’t “kosher”, but it’s hard to read black and white and understand the intent.

Regarding the high compensation for Mark Affleck. I wonder if this level was at all a performance-based bonus because it’s one of the premier grower associations and he achieved so much in his time there? I don’t know.

Your company and mine are each one of many members of PMA, and I have no idea what Bryan Silbermann, president of the organization, gets paid, nor do I think as a member it’s my business. The Executive Committee takes care of it (as I did when I was on Executive Committee), and even the board is unaware of the salary level of any staff member.

I think that’s as it should be, and if PMA or United or any industry association or board is successful, then I hope the Executive Committee will reward the CEO and work hard to keep him.

Other things like Tommy Bahama shirts for the booth or shows may not sound good, but I can’t tell you how many times we have been to member food shows and needed to buy a football jersey, baseball jersey, overalls, whatever, to keep with the show theme. And there is something to be said for a sharp, uniform look of your representatives.

Is the commission entitled to give gifts to employees sans tax consequences? I believe, so, we all do it — we give employees cash at Christmas, logo jackets, logo Ipods, etc. All unreported.

So, as I said, I am a bit conflicted, as I watch this very capable leader getting trounced. On the other hand, I will tell you that my CFO and I have reviewed that report and are reviewing our own books for “gray” areas that may not look good under the light of closer scrutiny. I guess in the end, it’s different as a California-chartered commission versus our privately owned firm. Seems a bit unfair to Mark, but maybe he not only didn’t handle money properly, but grower relations as well.

Thanks as always for the good reflections and insights.

We appreciate the thoughtful letter yet must say that there are some points made that concern us:

  1. The IRS rules on providing clothing for employees is clear.Clothing that is required as a condition of employment AND cannot be worn as ordinary clothing is not taxable. So basically uniforms are not taxable. These can be clothes that by their nature are not ordinary clothing — say, a nurse’s outfit — or can be regular clothing made unsuitable to wear as ordinary clothing by the addition of a logo, so all those golf shirts with logos given out to employees at conventions are fine. What you cannot do is tell your employees to go to the mall and buy Armani suits that can be worn anywhere and tell them to expense the suits. Since they are suitable as “ordinary clothing,” giving them to an employee is the same as giving money and is taxable.
  2. We don’t know how much cash our friend gives out at Christmas time but it is a bad idea. A bonus is taxable income; giving the bonus in cash doesn’t magically make it tax-free when payment with a check would be taxable.
  3. In general, items with conspicuous logos that cannot be removed are advertising for the firm and thus not taxable. Probably nobody will bother you if at Christmas you give out a door prize at the company Christmas party, but the principle remains: If a company gives money to its employees, that is taxable income. You can’t subvert that rule by saying you will give the employee a stereo system instead.
  4. In general, non-accountable expense allowances are strictly limited by IRS rules. You can’t just give your employees $750 a month for gas, as the California Avocado Commission did with some employees, and then declare that a business expense. There are legally allowed mileage allowances or you can keep a diary of exact expenses, but just giving allowances is typically a taxable event.

We haven’t published compensation lists because we don’t want to appeal to the prurient interests of people, and the connection between a typical member and an association is such that few people would consider it their business. Yet we would make two points:

First, although a typical member who is contributing a membership fee to a national association isn’t vested enough to care, we think these mandatory contribution organizations, such as the California Avocado Commission, are a different bird. After all, an avocado producer is contributing 3% of his sales into the commission and a much higher percentage of his net profits. So any reasonably sized avocado producer “owns” that organization in a way few members feel they “own” national voluntary associations. If we were contributing such a big chunk of our income to an association, we would say it is definitely “our business” what they are paying people.

Second, as a matter of law, we do not think that punting the responsibility for setting executive compensation over to a compensation committee or an executive committee can, in any way, lesson the responsibility and liability of members of the board of directors. After all, how could the board of directors judge if the compensation committee or executive committee is doing a good job if they don’t know what they are deciding? The entire board has a fiduciary responsibility to the members to ensure their money is being spent prudently and, if it is not, they could be sued. We think every board member should be aware of the contractual terms with the CEO of the organization. In fact they should have to vote to accept the contract, and they should not vote without reading the contract.

We wrote a piece in the current issue of Pundit sister publication, PRODUCE BUSINESS, titled The Squandering of Goodwill, in which we point out that the loss to the industry as a result of this problem is far more than money. The industry advances in no small part because of trust and faith that various communal efforts will work for the betterment of the industry. The events at the California Avocado Commission will place a shadow of doubt over such efforts for a long time to come.

The best hope is for boards of directors to declare themselves to be Reaganites. When it comes to communal institutions: Trust, but Verify.

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