Reeds Board (REED); is it functional? As indicated in a previous post, it might be useful to try and apply the recently announced Commonsense Principles of Corporate Governance to Reed’s Inc. and their board of directors. This will probably be something of an exercise in futility with mostly blank spots, since Reeds is a very small company, with little coverage and I don’t know much about what the Reeds Board actually does, only something about what they should be doing. I’m not a very large shareholder, so it isn’t financially worth a major effort for me to mount a challenge to the current Reeds Board or management. However, I am hoping this exercise may be helpful to others considering such a challenge or even just a simple books and records request at Reeds or elsewhere.
The business leaders who authored the Commonsense Principles hoped that, “at the very least, these principles will serve as a catalyst for thoughtful discussion.” That’s the intent here. I hope that my very quick review of the Commonsense Principles might be a catalyst for discussions between the Reeds Board and concerned shareholders. I don’t have time to go through all the Commonsense Principles, so I will just highlight a few that seem relevant to the Reeds Board. Like the authors of the Commonsense Principles, my hope is that this post and other communications will lead to thoughtful discussions between the Reeds Board and the shareholders of Reeds Inc.
I. Reeds Board of Directors – Composition and Internal Governance
a. Reeds Board: Composition
- Directors’ loyalty should be to the shareholders and the company. A board must not be beholden to the CEO or management. A significant majority of the board should be independent under the New York Stock Exchange rules or similar standards. The current Reeds Board has four members. Christopher John Reed, Chairman of the Board, President, and Chief Executive Officer; Judy Holloway Reed, Corporate Secretary (and wife to Christopher Reed); Michael Fischman and Daniel S.J. Muffoletto.
Since Mark Harris mysteriously resigned from the board, only the last two are independent. Most American boards have only one corporate officer serving on the board, the CEO. How can the Reeds Board effectively evaluate the CEO and hold him accountable when a majority of the board isn’t even independent? Even when Harris was a director, the Reeds Board didn’t meet the minimal Commonsense Principles of having a “significant majority” of independent directors.
- Ideally, in order to facilitate engaged and informed oversight of the company and the performance of its management, a subset of directors will have professional experiences directly related to the company’s business. According to the latest proxy, Mr. Fischman has been “President and chief executive officer of the APEX course, the corporate training division of the International Association of Human Values. In addition, Mr. Fischman is a founding member and the director of training for USA at the Art of Living Foundation, a global non-profit educational and humanitarian organization at which he has coordinated over 200 personal development instructors since 1997.” Frankly, I don’t see the that experience as “directly related to the company’s business.” Dr. Muffoletto “has practiced as a Naturopathic Physician since 1986. He has served as chief executive officer of Its Your Earth, a natural products marketing company since June 2004.” I can understand Muffoletto’s experience as relevant to product formulation and marketing. However, as I read the Commonsense Principles, the Reeds Board should include executives or former executives from large and/or successful beverage companies. That kind of experience would be “directly related to the company’s business.” Without new members with such experience, the Reeds Board doesn’t make the cut.
b. Reeds Board: Election of directors
- Directors should be elected by a majority of the votes cast “for” and “against/withhold” (i.e., abstentions and non-votes should not be counted for this purpose). Even though the Reeds Inc. bylaws claim to require a majority standard to elect directors, Dr. Muffoletto has been reelected two years in a row without a majority affirmative vote. See Zombie Director Voted Out at Reed’s – Again.
I opposed Muffoletto’s reelection because he appeared to be unwilling to invest in Reed’s Inc. himself and the Reeds Board has not awarded him any stock for his many years of service. However, Muffoletto has since informed me that he has purchased shares on the open market. As I told him at the last annual meeting, I opposed him primarily because he had no skin in the game. That is now off the table and he is the only director I have seen at annual meetings other than the CEO. Those points factor in his favor, so all else being equal, I’m more likely to vote for him. As far as I know, the only other independent director, Michael Fischman, still owns no shares. If that doesn’t change, I’ll oppose him for that reason alone. According to the 2014 proxy, he also made less than 75% of the meetings. Nell Minow tells of originating that guidance at Institutional Shareholder Services and how in the first year of implementation, she had to recommend voting against her own father as a director on a corporate board. [Watch Newton Minow: An American Story.] As the Common Sense Principles put it, “Directors need to commit substantial time and energy to the role.”
c. Reeds Board: Nominating directors
- Long-term shareholders should recommend potential directors if they know the individuals well and believe they would be additive to the board. This is a road worth exploring. I have been a shareholder since 2007 and passed on the names of two individuals with industry experience at the executive level (one is an ethnic minority) to Mr. Reed and to Mr. Muffoletto. Mr. Reed’s response so far has not been positive. As of the time of this post, I haven’t heard back from Muffoletto. The need for both industry experience and greater diversity on boards are widely recognized. According to Common Sense Principles,
Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool.
In my discussions with Mr. Reed, he brought up the issue that major companies prefer to do business with companies that have diverse boards.
d. Reeds Board: Director compensation and stock ownership
- A company’s independent directors should be fairly and equally compensated for board service, although (i) lead independent directors and committee chairs may receive additional compensation and (ii) committee service fees may vary. Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of director compensation in stock, performance stock units or similar equity-like instruments. According to a Reeds Board proxy statement in 2015, Michael Fischman and Daniel Muffoletto held no shares in Reeds Inc. Fischman was paid just $900 for his services as a director, while Muffoletto was paid $11,113. A study (2012-2013) by the National Association of Corporate Directors (NACD) found that micro-cap firms (like Reeds) paid directors a median of $97,308 for board service. Median pay for directors at micro-caps grew to $105,583 by 2014. (Few hours, soaring pay for corporate board members) The latest NACD survey found the average director spent 248.2 hours on board related activities. According to those figures, Fischman wasn’t even paid enough to meet required minimum wage standards. The Reeds Board should be “fairly” compensated with substantially more in both cash and stock.
e. Reeds Board: Board committee structure and service
- A board should have a well-developed committee structure with clearly understood responsibilities. Disclosures to shareholders should describe the structure and function of each board committee. Board charters are available on the Reeds website on the Management page.
- Boards should consider periodic rotation of board leadership roles (i.e., committee chairs and the lead independent director), balancing the benefits of rotation against the benefits of continuity, experience and expertise. The Reeds Board only has two independent directors. Both sit on all three board committees. Would rotation make any difference under those circumstances?
f. Reeds Board: Director tenure and retirement age
- Some boards have rules around maximum length of service and mandatory retirement age for directors; others have such rules but permit exceptions; and still others have no such rules at all. Whatever the case, companies should clearly articulate their approach on term limits and retirement age. And insofar as a board permits exceptions, the board should explain (ordinarily in the company’s proxy statement) why a particular exception was warranted in the context of the board’s assessment of its performance and composition. Does Reeds Board have such policies? If so, I don’t see them.
g. Reeds Board: Director effectiveness
- Boards should have a robust process to evaluate themselves on a regular basis, led by the non-executive chair, lead independent director or appropriate committee chair. The board should have the fortitude to replace ineffective directors. Although the proxy discusses the fact that committees evaluate the auditor and board nominees, I don’t see any indication the Reeds Board evaluates its own performance, either as individual directors or as a group.
II. Reeds Board – Responsibilities
a. Reeds Board: Director communication with third parties
- Robust communication of a board’s thinking to the company’s shareholders is important. The only independent director I’ve ever seen at an annual meeting is Daniel Muffoletto. There’s nothing “robust” about the Board’s communication to shareholders that I am aware of.
- In addition, the CEO should actively engage on corporate governance and key shareholder issues (other than the CEO’s own compensation) when meeting with shareholders. In my own limited experience, Mr. Reed is responsive to product and marketing inquiries and suggestions but not so much on corporate governance related matters.
b. Reeds Board: Critical activities of the board; setting the agenda
- At each meeting, to ensure open and free discussion, the board should meet in executive session without the CEO or other members of management. The independent directors should ensure that they have enough time to do this properly. According the latest proxy,
During 2015, the Company’s non-management directors, all of whom are considered to be “independent” as defined under the listing standards of the NYSE MKT and within the meaning of the Sarbanes Oxley Act of 2002, Section 301(3), were provided with the opportunity to meet in executive sessions of the Board in which management directors and other members of management did not participate. [my emphasis]
I presume that if the Reeds Board availed themselves of such opportunities the proxy would so indicate. Since it does not, I assume Mr. Reed or other members of the management team are always present at board meetings. The Corporate Secretary is Mr. Reed’s wife. Even if Mr. Reed is out of the room, if Ms. Reed is keeping the minutes, one could hardly call that an executive session.
III. Reeds Board: Shareholder Rights
a. Many public companies and asset managers have recently reviewed their approach to proxy access. The Commonsense Principles take no position, while the Reeds Board has opposed proxy access.
b. Dual class voting is not a best practice. Although Reeds Inc. does not have a dual class voting structure, the Reed family owns about 26% of the company’s common stock, giving them similar control to what might be in effect through dual class shares.
c. Written consent and special meeting provisions can be important mechanisms for shareholder action. Written consent is provided for in the bylaws but only the Board can call a special meeting. That seems to fail Commonsense Principles.
IV. Reeds Board: Public Reporting
a. Transparency around quarterly financial results is important.
b. Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals.
I used to think Mr. Reed’s seemingly off-the-cuff remarks during quarterly earnings calls were refreshing. After listening to a great number of calls, I’m beginning to think that’s how he runs the company… off-the-cuff, without strategic planning by the Reeds Board.
V. Reeds Board: Board Leadership (Including the Lead Independent Director’s Role)
a. The board’s independent directors should decide, based upon the circumstances at the time, whether it is appropriate for the company to have separate or combined chair and CEO roles. The board should explain clearly (ordinarily in the company’s proxy statement) to shareholders why it has separated or combined the roles. Did I miss it? I don’t see any discussion by the Reeds Board in the proxy about why they have chosen to combine the chair and CEO roles.
b. If a board decides to combine the chair and CEO roles, it is critical that the board has in place a strong designated lead independent director and governance structure. Does Reeds Board have an independent lead director? I don’t see any mention of a lead director in either the bylaws or the proxy.
c. Depending on the circumstances, a lead independent director’s responsibilities may include:
- Serving as liaison between the chair and the independent directors
- Presiding over meetings of the board at which the chair is not present, including executive sessions of the independent directors
- Ensuring that the board has proper input into meeting agendas for, and information sent to, the board
- Having the authority to call meetings of the independent directors
- Insofar as the company’s board wishes to communicate directly with shareholders, engaging (or overseeing the board’s process for engaging) with those shareholders
- Guiding the annual board self-assessment
- Guiding the board’s consideration of CEO compensation
- Guiding the CEO succession planning process
How are those responsibilities being met at the Reeds Board? I have seen no evidence of a lead director, board meetings in executive session, meaningful input into meeting agendas, Board communications with shareholders, annual Board self-assessments, guidance on CEO compensation or CEO succession planning. If you have evidence to the contrary, please share it either through the comment block below or via email.
VI. Reeds Board: Management Succession Planning
a. Senior management bench strength can be evaluated by the board and shareholders through an assessment of key company employees; direct exposure to those employees is helpful in making that assessment.
b. Companies should inform shareholders of the process the board has for succession planning and also should have an appropriate plan if an unexpected, emergency succession is necessary.
I see no evidence of any such planning or communication. I do remember asking about CEO succession planning at one of the annual meetings. As I recall, Mr. Reed joked about being succeeded by his son, who as far as I know, doesn’t work for the company.
Reeds Board: Conclusion
Other portions of the Commonsense Principles address executive pay and the role of asset managers in corporate governance. Mr. and Ms. Reed appear to primarily be compensated through their stock ownership. Sorry, I haven’t taken the time to examine what performance measures they or others on the executive team are taken to incentivize them further. Institutional shareholders are likely to play a much smaller role at Reeds, Inc. than at most companies since the ten largest institutional holders own only about 12% of the company and their individual holdings in Reeds are probably not enough for them to monitor. For example, Vanguard owns about 1.5% of Reeds, Inc but that represents less than hundredth of a percent of their portfolio, so why bother? If change comes at Reeds, it is likely to be retail shareholders leading the way. I hope you will join us in upcoming votes to change the company by creating a more fully functional independent Reeds Board.