Where Was The Board?
A Short & Heretical Look At The State of Public Company Corporate Governance
How many times have you read about the plight of a company such as fraud, bribery, financial misstatements, off-balance sheet shennanigans and the like followed immediately by the refrain “Where was the board?” When things of a legal or quasi-legal nature go wrong within a company, everyone wants to know where the “police body” was when the ill deeds were taking place. This is because the prevailing view of what a board of directors is about is “oversight” and the management of “risk.”
I thought about this today when reading about Elliott’s $4 Billion investment in Pepsico. Here, from Elliott’s presentation is a look at the state of PepsiCo:
PepsiCo is deeply undervalued - over the last 10 years the average NTM PE multiple has been 22X. It currently stands at 18X. And, the current discount to the S&P Consumer Staples NTM PE is negative 4.1X.
In comparing PepsiCo TSR to the S&P 500 Consumer Staples Index. Pepsico has been a cumulative underperformer over any period during the last 20 years.
There has been a persistent share loss and margin erosion in North American Beverages
Bloated portfolio in North American Beverages
Decelerating growth and declining margins in North American Foods
There is considerable detail in Elliott’s presentation (link above) in regard to the current state of the company and Elliott’s go forward value creation plan. However, for the purpose of this article the summary above suffices. It clearly shows that there are glaring signs of underperformance in the company’s North American operations.
All of this leads me to ask (loudly): Where was the board? I applaud Elliott’s work but why does this situation with PepsiCo require an activist to identify these shortfalls and take action toward the development of PepsiCo’s full potential? Wait, you say. There is nothing in the summary above about PepsiCo committing an illegal act. There is nothing there that needs a “police body.” Why would you ask a stupid question like that?
I ask the question because I am a corporate governance heretic. I do not believe that boards of directors should sleep through bouts of underperformance and undervaluation. In fact, I believe that operating performance, capital allocation and shareholder value are the primary responsibilities of the board and that the board should be functioning continually with a sense of urgency to fulfill these primary responsibilities.
Time is drawing nigh for a major public company corporate governance reckoning. I have been a lone wolf (no pun intended) howling in the wilderness for years about this. But, the signs are there that perhaps the tide is turning. Very recently, McKinsey published an article (which I critiqued) that offered several ways that public company boards can incorporate the value driving practices of the top private equity portfolio company boards. The pressure to perform will continue to rise - “police body” boards will not cut it in this environment and the board dinner will no longer be the most energized aspect of the meetings.