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Pundit’s Mailbag — Lesson From Avocadogate: You Get What You Tolerate

Our piece, Audit Of California Avocado Commission Raises Questions Of Use Of Funds And Governance Policies, brought an avalanche of mail… mostly expressing incredulity that the head of a commodity promotion group would be paid $400,000 a year, forget about any malfeasance or exceptional benefits. Here is how one industry leader who has served on the board of many industry groups expressed it:

I hope the good people at the CAC aren’t hurt through this investigation. I don’t know about you, but no CEO of a commodity board or commission should make $400,000+. Their budget was about $15m.

I knew that Mark was highly paid but not the $400k plus. He was not even an 8 to 5 five days-a-week guy as he was allowed to do his motivational speaking and some church work during the work week.

Shame on the Board of Directors.

The actions were so widespread, so overt, so blatant, that many simply had trouble believing that the board didn’t know about this. Eric Schwartz, who we worked with extensively (you can read some of the pieces here, here, here , here and here) when he was President of Dole Vegetable Company during the spinach crisis, had this take on the matter:

Having spent a considerable amount of time on both the Californian and Arizona Leafy Greens Marketing Boards, I cannot understand how the lavish spending at the Avocado board could have gone unnoticed for so long by the grower community that it represented.

I guess one could always look to blame the state for not having enough oversight, but it seems the grower members should start by asking themselves how they could have allowed the board to operate with such limited transparency as to allow these types of abuses to occur.

One of my favorite sayings is that “you get what you tolerate”.

— Eric Schwartz
Chief Operations Officer
SK Foods Group
Monterey, California

In general, the critiques broke down into those two categories: The first, focused on total compensation. The second, focused on governance.

When it comes to total compensation this is always going to be a judgment call by the Board of Directors and, typically, the compensation committee of the board.

Very few people in the produce industry who are not owners are paid over $400,000 a year, but a number of those who work for large corporations have had the opportunity to make extra money through stock options, bonus plans and other kinds of deferred compensation that are not typically available to association and promotion group leaders.

It is also the case that it is very difficult for a grower in a rural area to appreciate how expensive it can be to live in places such as Washington, DC, or Irvine, California, where the avocado commission is headquartered.

The real estate Web site, Zillow, for example, estimates that home prices in Irvine are about triple the national average, despite having tumbled in the past year. Because the national average includes many expensive areas, this means home prices in a place like Irvine are probably five times what they are in a place like, say, Yakima.

And the CEO’s pay is typically a ceiling. If the feeling of the commission is that it wants to be able to attract a high-level person to a job such as Marketing Director, the CEO’s pay has to be high enough that his staff can be paid in a way that will attract and retain such people.

Still, we were frankly shocked by the number of people in the avocado industry who claim they are shocked to learn what Mark Affleck was making.

All the information is public; it just typically isn’t published widely because of a sense of decorum. Perhaps, though, our industry organizations should prominently make public the compensation of the top executive in an annual report published on their web sites. There is something troublesome about the notion that the board or executive committee should be trying to hide the CEO’s salary from the membership. If the membership needs education to understand the market for top executives in a given region, that is part of the responsibility of leadership.

Which points to the other issue — governance. The whole situation reminds us of two situations that had different comeuppances. One was that of Dick Grasso, who had been CEO of The New York Stock Exchange. No less a personage than Elliot Spitzer, then New York’s Attorney General brought charges alleging excessive compensation. And the papers were filled with board members of the stock exchange — financial wizards all — claiming that they somehow didn’t know that he was bringing home hundreds of millions of dollars.

In the end, the court threw out the charges.

The other was the case of Dennis Kozlowski of Tyco. It was alleged that he took compensation from the company that was not authorized by the board, though nothing that was alleged to have happened was particularly secretive. Still he was convicted:

Former prosecutor David Gourevitch said the Tyco result indicates that juries are willing to convict in highly complex corporate cases and to hold executives accountable for behavior that may once have seemed acceptable.

“I think what you get out of this is the imposition of a very high standard of behavior on corporate executives,” Gourevitch said. He said the case was not one in which most of the allegedly criminal behavior was deeply hidden from public view. Instead, he said, “it was a case in which everything was pretty much out in plain sight. . . . The message to executives from this ought to be that if it doesn’t feel right, it isn’t right.” Gourevitch called the verdict “hair-raising” for defense lawyers.

It was the second criminal trial for Kozlowski and Swartz, who were accused of stealing $170 million from Tyco by abusing corporate loan programs and taking unauthorized bonuses and taking $430 million more by selling stock at prices artificially inflated by their misstatements about the company’s finances.

The first case ended in a mistrial in April 2004 after several news organizations published a juror’s name during deliberations and the juror told Obus that she had received a threatening letter and phone call.

After the first trial, jurors said in interviews that the juror, Ruth Jordan, was the lone holdout for acquitting both men on a number of charges. Jordan was in the courtroom through much of the second trial and was in attendance taking notes as the verdict was read on Friday.

In a telephone interview after the verdict, Jordan said she was surprised at the result and continues to believe Kozlowski and Swartz did not act with criminal intent. “My own opinion is that I still think they are not guilty,” she said. “But I have to be sure to say that this is a new jury, and they are entitled to their own verdict. I still believe in the jury system.”

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.

If he had stuck to offering benefits, even rich benefits, that were within the scope of what the tax law permitted, then his position would be defensible. But there are strict IRS rules on things such as car allowances, and one can’t just give one’s employees $10,000 because they purchase a car and not report it. Equally, the commission could spend all it wants on logo wear and give it to employees. But if you tell your employees to go to a department store and buy outfits that they get to keep, that is called compensation by another name and is taxable.

It is unclear what specifically motivated this audit and Mark’s departure. Maybe a new board member poked around, maybe a staff member whispered that something isn’t right. But Mark should have known the story of Al Capone who was famously convicted, not for being a gangster, but for tax evasion.

We think Eric Schwartz is onto something and so thank him for his blunt letter. This behavior, even if not specifically endorsed was, at least, tolerated and that is the best explanation as to why it happened.

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