Case Study #11—Martha Stewart Read the Martha Stewart case study located in the section titled Case Studies in your textbook concerning the following situation: This case focuses on the corporate gove
CASE 11: Corporate Governance at Martha Stewart Living Omnimedia: Not “A Good Thing” James B. Shein Northwestern University Going to prison usually ends the career of an executive—unless the executive is Martha Stewart. Stewart’s five-month stay in an American prison in 2005 put an unsightly smudge on her highly polished image as doyenne of the domestic arts. She resigned as chairman and CEO of the company she founded and controlled, Martha Stewart Living Omnimedia (MSO), after her 2004 conviction related to an insider-trading1 investigation, but her personal image was so closely intertwined with her company that revenues and share prices still plummeted. When she returned to MSO after her release, advertisers and broadcasters were quick to forgive the tall, blonde celebrity; they flocked back to her namesake magazine and even signed her to star in two new TV shows. Under the leadership of a new CEO backed by Stewart and her allies on the board, MSO seemed by 2006 to be headed for a recovery. But new technology was undermining the company’s business model and serious threats loomed from competitors. It would be Stewart herself—a former model and caterer whose devotion to domestic perfection and luxury had made her a brand icon—that would be the central player in the outcome. A Brief History of Martha Stewart Living Omnimedia The seeds of Martha Stewart’s larger-than-life career were planted in early childhood. Born Martha Kostyra, the second of six children of Polish immigrant parents, she inherited her mother’s passion for cooking and sewing and her father’s love of gardening. Her father instilled in her “the quest for perfection, with any task,” she once told a reporter. “If I was laying a cobblestone path for him in the garden, it had to be lined up straight with a string. The stones had to have the exact same amount of space between them.”2 To her father, and to Martha, perfection in form and detail was synonymous with enduring value. Stewart worked part-time as a model in high school and college and took a job as a stockbroker after graduation. A former boss said she was “fabulously successful.” But when the stock market crashed in 1974, she quit. According to her former boss, she couldn’t bear seeing people lose money on her advice.3 After marrying Andy Stewart (a lawyer and publisher of art books) in 1961, she returned to Barnard College and completed a degree in history and architectural history. Stewart’s talent for decorating became apparent when she and her husband bought and restored an old farmhouse. She also built a successful catering business in her basement with a friend from her modeling days. When she catered a book release party for her husband, Stewart met Alan Mirken, head of Crown Publishing Group, who later contacted her to develop a cookbook. The result was her 1982 book Entertaining, a celebration of stylish party giving. Several more books and television appearances followed. Her 1987 book Weddings ignited a trend toward lavish wedding ceremonies and receptions in the United States. Mothers of the bride were soon toting the $50 volume around under their arms. Stewart had caught a wave. As women increasingly made strides in the workplace, yearning for home and hearth was on the rise. With her authoritative, patrician bearing, Stewart was able to elevate domestic skills to an art form. Many fans aspired to adopt her elegant style, and her do-it-yourself ethos provided new outlets for self-expression. ©2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the December 2009 graduates of the Executive MBA Program (EMP-76). This case was prepared by Professor James B. Shein. Early research on this case was provided by Funmi Agbebi ’13, Carman Empey ’14, Mallory Gregor ’14, and Darcy Rutzen ’14. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847.491.5400 or e-mail [email protected] No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing. Stewart laid the cornerstones of her media empire in the early 1990s with the launch of her flagship magazine, Martha Stewart Living, in partnership with Time Inc., and a syndicated television show by the same name. She produced and hosted the show, preparing recipes in Julia Child’s stand-and-stir style and showing approval with her trademark comment, “It’s a good thing.” Another magazine, Martha Stewart Weddings, followed in 1994. Stewart sought help with operations from Sharon Patrick, a former McKinsey & Co. partner whom she met climbing Mount Kilimanjaro in 1993. A shrewd negotiator, Patrick helped Stewart acquire control of her business from Time Inc. in 1997 and form Martha Stewart Living Omnimedia. Stewart and Patrick then caught another trend among retailers—a shift away from individual items toward entire categories of goods. Patrick negotiated a ground-breaking deal with Kmart, then the second-largest retailer in the United States, to sell branded Martha Stewart housewares and linens in its stores. The partnership generated big profits for MSO and left an indelible mark on merchandising by bringing tasteful design to low-cost consumer goods. The success of the arrangement paved the way for other low-cost, upscale branding efforts by stores like Target. Stewart’s personal tastes, personality, and lifestyle were the context for everything at MSO. Her TV studio was a replica of her own kitchen. She harvested ingredients from her garden and refinished her lawn furniture on the show. Her maniacal devotion to detail and perfection instilled trust in her brand. “I wash the sheets myself. I count the stitches … We care that we’re not disappointing anybody,” she told a reporter.4 By the late 1990s, Stewart had become the nation’s preeminent female brand name, inspiring comparisons to Calvin Klein, Tommy Hilfiger, and her personal role model, Ralph Lauren.5 As Stewart and Patrick began preparing to take the company public, analysts likened her fans to a cult. Some questioned the wisdom of basing a public company on one person’s image. “If you are basing your entire public issue on that one name,” one analyst said, “you have to question how you can broaden it so that the whole company does not suffer if the head person gets hit by a bus—or by a scandal.”6 MSO promised in its prospectus to promote “a new generation of Martha Stewart Living experts” and to publicize other members of the creative team. On the day of the IPO in 1999, it was Stewart herself who stood outside the New York Stock Exchange handing out scones and fresh-squeezed orange juice. Wall Street responded with equal warmth. The stock surged from the $18 initial price to $36, making Stewart America’s first self-made female billionaire.7 At many companies, the board of directors provided over sight of strategic planning, in some cases by establishing a strategic planning committee to provide stability and continuity during leadership transitions. MSO’s bylaws required four committees: audit, compensation, finance, and nominating and corporate governance. The bylaws also made the board responsible for monitoring the “principal risk exposures” of the company, and assigned oversight to the audit committee. Directors received training on risk management during an orientation session that included learning about MSO’s officers, auditors, strategic plans, corporate governance, compliance programs, and code of ethics, and were given a corporate headquarters tour. Training beyond that was voluntary; MSO “encouraged directors to participate in education programs” to help them meet their responsibilities. Because Stewart was not only chairman and CEO but also the controlling shareholder (Exhibit 1), she was able to name Patrick chief operating officer and appoint her as a director. She also invited her old friend Charlotte Beers, former CEO of the ad giant Ogilvy & Mather, onto the board. Exhibit 1: Martha Stewart Living Omnimedia Board of Directors, 2003–2012 Director Bios Charlotte Beers: Former chairman of J. Walter Thompson Worldwide; previously chairman and CEO of Ogilvy & Mather and chairman emeritus of Ogilvy & Mather Worldwide Inc.; Under Secretary for Public Diplomacy and Public Affairs for the George W. Bush Administration from 2001 to 2003. Identified as a candidate for the board by Martha Stewart. Rick Boyko: Managing director of the VCU Adcenter, a graduate advertising program at Virginia Commonwealth University; formerly co-president and chief creative officer of Ogilvy & Mather, New York. Identified as candidate for the board by Martha Stewart. Frederic Fekkai: Founder of Fekkai, a luxury hair-care product company with seven hair salons in the United States; founder and brand architect for the Fekkai brand at Procter & Gamble, which purchased the company in 2008. Identified as a candidate for the board by Martha Stewart. Lisa Gersh: President and chief operating officer of MSO from 2011 to 2013 and CEO of the company from 2012 to 2013. Previously president, strategic initiatives, of NBC Universal and managing director and CEO of The Weather Channel Companies. Previously co-founder of Oxygen Media LLC, serving as president and chief operating officer for nine years. Michael Goldstein: Chairman of Toys “R” Us Children’s Fund Inc., a charitable foundation. Previously chairman of the board, vice chairman, and CEO of Toys “R” Us Inc. Identified as a candidate for the board by Martha Stewart. Jill A. Greenthal: Senior managing director of the Blackstone Group; previously co-head of the global media group and a member of the executive board of investment banking at Credit Suisse First Boston. Previously co-head of the Boston office of Donaldson, Lufkin and Jenrette and head of the media group at Lehman Bros. Arlen Kantarian: Former CEO of professional tennis for the United States Tennis Association; previously president and CEO of Radio City Entertainment and vice president, marketing, for the National Football League. Charles Koppelman: Executive chairman and principal executive officer of MSO from 2009 to 2011. Chairman and CEO of CAK Entertainment Inc., a music and entertainment business. Previously chairman and CEO of EMI Music Publishing; chairman and CEO of EMI Records Group, North America; and chairman of Steve Madden Ltd. Michael Kramer: Chief operating officer for J. C. Penney Co. Previously president and CEO of Kellwood Co., executive vice president and chief financial officer of Abercrombie & Fitch Co., and former chief financial officer of Apple Inc.’s retail operations. Susan Lyne: President and CEO of MSO from 2004 to 2008. Previously president of ABC Entertainment and executive vice president of Walt Disney Pictures and Television Inc. Identified as a board candidate by a third-party search firm. Arthur C. Martinez: Former chairman and CEO of Sears Roebuck and Co.; previously chairman and CEO of Sears Merchandising Group and vice chairman of Saks Fifth Avenue. Wenda Harris Millard: Co-CEO of MSO from 2008 to 2009; previously chief sales officer at Yahoo! Inc. and chief Internet officer at Ziff Davis Media. Darla D. Moore: Executive vice president of Rainwater Inc, a private investment firm; previously a managing director of Chase Bank. Chairwoman and founder of The Palmetto Institute, a private policy research group. Sharon L. Patrick: President and chief operating officer of MSO from 1997 to 2004; CEO from 2003 to 2004; previously president of The Sharon Patrick Company, a strategic consulting firm; president and chief operating officer of Rainbow Programming Holdings, a unit of Cablevision Systems Development, and a principal at McKinsey and Co. leading the media and entertainment practice. William A. Roskin: Founder of Roskin Consulting, specializing in media-related human relations; previously a senior advisor and senior executive in charge of human resources and administration at Viacom Inc., and senior vice president, human resources, at Coleco Industries Inc. Naomi O. Seligman: Co-founder of Ostriker von Simson Inc., an e-commerce consultancy; previously co-founder of Research Board Inc., an information technology research group. Thomas Siekman: Of counsel for Skadden, Arps, Slate, Meagher & Flom LLP; previously senior vice president and general counsel of Compaq Computer Corp. and senior vice president and general counsel of Digital Equipment Corp. Bradley E. Singer: Chief financial officer and treasurer of American Tower Corp.; previously an investment banker in the communications, media, and entertainment group at Goldman, Sachs & Co., and chief financial officer at Clyde’s Restaurant Group. Claudia Slacik: CEO, treasury and securities services, Europe, Middle East, and Africa, at JPMorgan Chase; previously chief financial officer for the group; global head of client strategy for Citigroup’s $10 billion global transaction services group; global head of trade services and finance at Citigroup; and vice president, strategic planning, at World Color Press, one of KKR’s original LBOs. Todd Slotkin: Portfolio manager of Irving Place Capital, an institutional private equity firm; previously managing director and co-head of Natixis Capital Markets Leveraged Finance business; executive vice president and chief financial officer of MacAndrews & Forbes Holdings Inc.; and chief financial officer of M&F Worldwide Corp. Margaret Smyth: Former vice president and chief financial officer of Hamilton Sundstrand, a unit of United Technologies Corp.; previously vice president and corporate controller of United Technologies Corp., and vice president and chief accounting officer of 3M Corp. Martha Stewart: MSO founder and chief editorial, media, and content officer. Previously chairman and CEO from 1996 to 2003; author, creator of Martha Stewart Living magazine, television host. Jeffrey W. Ubben: Founder and managing partner of VA Partners LLC, an investment partnership; previously managing partner of Blum Capital and a portfolio manager for Fidelity Investments. Daniel Walker: Chief talent officer for J. C. Penney Co.; previously chief talent officer for Apple Inc. and vice president, human resources, for The Gap Inc. Source: MSO Proxy Statements. Competition By the 2000s, MSO was facing new competition and changing markets on all fronts. Rivals were taking share in lifestyle-related publishing, the source of 62 percent of MSO revenues. After Stewart cut ties with Time Inc., the Time-Warner unit launched a competing magazine, Real Simple, which appealed to a younger, less traditional audience than Stewart’s by offering practical, time-saving tips for getting things done. Daytime television diva Oprah Winfrey followed with O, the Magazine. Meredith Corp., with a business mix similar to MSO’s, including the biggest home-and-garden magazine, Better Homes and Gardens, was extending the brand into licensed products, including paint and furniture coverings. In addition, changing technology was giving rise to a new generation of low-cost competitors. A 1996 Internet startup, TheKnot.com, posted rapid growth in online advertising and content for weddings, a core MSO competency. TheKnot.com soon spun off TheNest.com for newlyweds and TheBump.com for expectant parents. Established competitors, too, were expanding rapidly in e-commerce. Ralph Lauren Corp., also a designer of home and lifestyle products, partnered in 2004 with GSI Commerce, an e-commerce and technology provider, to sell its branded merchandise online, an alliance that generated hundreds of millions of dollars in sales for Lauren. In broadcasting, the source of 13 percent of MSO’s revenues, ad sales were under pressure from online competition and shrinking audiences for daytime TV.