Feb. 22 (Bloomberg) -- Avon Products Inc. directors debated for three weeks whether to fire Andrea Jung before deciding to remove her as chief executive officer and retain her as chairman, according to two people familiar with the matter.
Avon’s nine independent directors decided Jung, 53, should stay on because she’s the well-known face of the company and a role model for its 6.5 million mostly female sales representatives, said the two people, who declined to be named because the matter is private.
The directors also didn’t want to oust Jung amid management turnover and as Avon probes potential violations of the Foreign Corrupt Practices Act, said one of the people, who called the decision to keep Jung on as chairman an elegant solution.
Doing so, however, may make it harder for the new CEO to turn Avon around, Rakesh Khurana, a professor at Harvard Business School in Boston, said in a telephone interview.
“While separation of chairman and CEO is considered best governance practice, if the former CEO stays on, especially when there are performance questions, that probably isn’t the best practice,” Khurana said. “Her staying on adds another layer of complexity to an already complicated and opaque situation.”
The board deliberations occurred in November and early December after Avon said third-quarter profit trailed analysts’ projections and announced that the U.S. Securities and Exchange Commission was investigating potential overseas bribery, the people said. That probe has since been taken up by a U.S. grand jury, a person familiar with the matter said last week.
Some directors initially wanted to fire Jung and even those who wanted her to stay on as chairman agreed Avon needed a new CEO, the people said.
Several meetings were held among independent directors, who then also met with Jung and negotiated a new contract with her to serve as executive chairman, one of the people said. Avon announced on Dec. 13 that it would separate the roles of chief executive and chairman and search for new CEO.
Victor Beaudet, an Avon spokesman, declined to comment.
Since taking the job in 1999, Jung has become inextricably entwined with the Avon brand. The first woman to lead the world’s largest direct seller of cosmetics, Jung, attired in designer-label clothing, her signature pearls and red lipstick, was a celebrity and women’s advocate as well as an executive.
She helped raise more than $800 million for Avon’s charitable programs, focused on breast cancer research and fighting violence against women, and encouraged sales representatives to gain economic independence by pitching the company’s products.
Because Jung had a marketing background, the New York-based company surrounded her with executives with operating experience, Connie Maneaty, an analyst at BMO Capital Markets in New York, said in a December interview.
Still, the Avon board gave Jung more latitude than most chief executives. Typically CEOs sign two-year or three-year contracts. Jung’s was open-ended and renewed again and again.
No longer. The new contract will run for two years once a new CEO is hired, and includes a potential two-year rather than three-year severance payment, according to a Dec. 16 regulatory filing. Her salary as chairman will fall to $1 million from about $1.38 million, and she’ll be paid a potential bonus of $2 million, compared with $3.8 million under her current agreement.
The new contract gives Jung an incentive to make sure the company is turned around. If the shares rebound to $30, near last year’s high, the value of Jung’s stock options will rise by about $9 million to $12.8 million, according to David Schmidt, a senior consultant at compensation advisory firm James F. Reda & Associates in New York. His calculations are based on a Feb. 15 valuation.
“Her name is so intertwined with this company, to have a turnaround is to her advantage -- just for her reputation,” said Schmidt, who estimates Jung passed up about $7.9 million in severance to stay at Avon.
As of yesterday’s close, Avon shares had risen 16 percent since Dec. 12, the day before the company announced Jung would be replaced as CEO. They fell 0.2 percent to $19.16 at the close yesterday in New York.
Jung, whose 13-year tenure as CEO is more than double the average five years for Fortune 500 chiefs, told analysts on Feb. 14 she wouldn’t interfere with the new CEO. Her successor will report to the board rather than to her, and Jung won’t have operational responsibilities after he or she is named, one of the people said.
Most Avon board members have worked closely with Jung for most of her tenure. Five of the nine independent directors have served on the board for a decade or longer. They include lead director Fred Hassan, managing director and partner at Warburg Pincus and chairman of Bausch & Lomb Inc.
“The kind of compromise directors reached to keep Jung on as chairman while also recruiting a new CEO serves no good purpose for investors,” Charles Elson, head of the University of Delaware’s Weinberg Center for Corporate Governance in Newark, Delaware, said in a telephone interview. “But at least the board limited Jung to a two-year contract. It’s a lot harder to terminate an executive with an open-ended contract that automatically gets renewed over and over.”
--With assistance from Lauren Coleman-Lochner in New York. Editors: Robin Ajello, Kevin Orland
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To contact the reporters on this story: Carol Hymowitz in New York at firstname.lastname@example.org; Jeff Green in Southfield, Michigan at email@example.com
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