Dow Chemical

Dow Chemical

Annual meeting: May 14

Amidst buybacks, layoffs and lawsuits, Dow Chemical Chairman and CEO, Andrew Liveris’s total disclosed compensation increased from $20,452,877 to $26,698,372.  This amount is twice the average CEO pay, based on data released today by the AFL-CIO, and 737 times that of the average worker. The CEO’s pay increase of approximately 30%, came at the same time as earnings per share, unadjusted, decreased by 22%, (unadjusted earnings per share were down from down from $3.68 in 2013 to $2.86 in 2014).

The stock price is up slightly – though it trailed the S&P 500 – but it appears it may be artificially propped up. Profit have been in decline, but the company had stock buybacks of over $4 billion in company stock in 2014 and has increased its share buyback plan. When the company announced in April that it would be reducing its workforce by approximately 3%, between 1,500 and 1,750 people, Nelson Peltz wrote that, “And there you have it: stock not following the company’s profitability decline due to buybacks, activists happy because stock is gradually rising, and the CEO is delighted because he made 30% more last year.”

Of more concern to shareholders than the specifics of the pay package are the recent revelations of a Reuters investigative report that suggest a CEO who is unable to distinguish between the company’s wealth and his own, and rules his fiefdom with a sense of entitlement.  The report, entitled “Dow’s top auditor challenged CEO on spending for years” found that at least four employees have raised concerns that Liveris “used his position to finance his lifestyle, favor his family or boost a charity that burnished his fame in Greece.” Each of these employees, including the company’s most senior internal auditor, has since left the company, and much of the data in the report became available based on a Sarbanes-Oxley whistleblower protection lawsuit filed by internal fraud investigator Kimberly Woods. Woods lawsuit claiming she was fired in retaliation raising such concerns has been settled by the company for an undisclosed sum. In her complaint Wood “claimed that internal auditors identified $13 million in cost overruns on the renovation of a company-owned hotel involving the CEO’s wife, Paula Liveris. And Wood alleged that Dow was using its $16 million contract with a consulting firm to channel money to a charity co-founded by Liveris.”

Following the initial investigation into how Liveris used a little-known and high-budget Customer Events department, Dow’s 2011 proxy statement disclosed that Liveris had “promptly reimbursed” the company $719,923 in 2011. The disclosure around that repayment under-girded a memo from then-chief auditor Doug Anderson in 2013 titled “Dow Confidential,” that outlines Anderson’s concerns on “errors in tax and proxy reporting.”   Reuters sets up a sentence by sentence comparison between proxy language and Anderson’s deposition, in two matching columns, that provides a crystal illustration of how language of proxy statements is used to obfuscate rather than inform.  Among other things, that proxy statement blames a lack of sufficient guidance for earlier failures but Anderson counters: “Knowing that the company shouldn’t pay for your son’s birthday party” should not require specific guidance.

In addition to the problematic specifics revealed in the report, insights into the culture of the company reveal other problems.  As the case was unfolding and Liveris suggested that it was time for an executive who had raised concerns to retire, Dow’s chief counsel, Charles Kalil, responded with an email to Liveris: “Remind me never to piss you off.”

The primary goal of the chief counsel of course should be on the company and its shareholders. Kalil’s compensation for 2014 was over $9 million, significantly above that of General Counsel’s at similarly sized companies. Kalil realized an additional $9 million in value of exercised stock options.

One hopes that internal controls have since been improved, but just a few weeks ago Dow Chemical filed a DEFA14A to “correct errors in the “Total” and “Total Without Change in Pension Value” columns to the Summary Compensation Table.” The corrected version showed a higher level of pay.