Avon Just Made Two Huge Decisions That Could Keep The Company Afloat


Photo: Getty Images/Mario Tama

Avon Products, Inc. (AVP)’s embattled former CEO Andrea Jung said she’ll step down as board chairman on December 31. The beauty company has taken several such moves toward restoring its credibility in recent months, and now has stronger corporate governance.While serving as both chairman and CEO, Ms. Jung came under fire for problems ranging from Avon’s underperforming stock price to its overseas bribery investigation, which we had discussed here. In December 2011 Avon announced Ms. Jung’s loss of the CEO title and said she would enter into a two-year employment contract.

But then, after announcing its appointment of Sheri McCoy as its new CEO and board director in April, Avon on October 5 said Ms. Jung will no longer act as board chairman while instead continuing as a senior advisor to the board beginning January 1, 2013. Fred Hassan, who has served since February 2009 as Avon’s lead independent director, will assume Ms. Jung’s position of non-executive board chairman on January 1.

Ms. Jung’s fall is a marked departure from the past. In an indication that her managers had previously allowed her too much freedom, she earned above $10.1 million in 2011, disproportionately more than Avon’s other named officers who all earned less than $5 million each that year.  Clearly, the separation of Ms. Jung’s dual roles as board chairman and CEO is positive, as it means Ms. McCoy will not be her own supervisor and the balance of power among Avon’s senior ranks makes more sense now. 

That isn’t the only positive change that Avon made recently. The company’s proxy statement filed this April shows that Avon changed its compensation policies in 2011, so that named executive officers now receive performance-based restricted stock units rather than stock options that simply vest over time regardless of what the managers do. Avon’s senior officers did not receive salary increases in 2011, and CEO stock ownership guidelines increased from five to six times base salary, among other things. Such moves suggest that Avon is now acting more in the best interest of its shareholders rather than of its managers.

Due in part to the recent disappearance of red flags about CEO compensation along with other issues, Avon’s financial data now results in an Accounting and Governance Risk (AGR ®) score of 69, indicating that Avon has higher risk than only 31% of comparable companies. Avon’s AGR score has reflected average risk since December, whereas in the quarters ended in June and September 2011, the score had indicated that Avon was accounting for its finances relatively aggressively rather than in a conservative light.

The improved AGR score seems unsurprising, given that Avon has made its management accountable for mistakes and thus motivated them not to neglect the law. The company’s former interim CFO and developed market group vice chairman Charles W. Cramb left Avon this January in connection with its overseas bribery investigation.  While it seems obvious that companies should remove the people in charge in such circumstances, it doesn’t always happen.

That said, Avon’s recent improvements do not make the company problem free. For example, 30% of Avon’s long-term incentives for named executive officers will now be payable in cash, which does nothing to tie these managers’ performance with long-term shareholder equity value.

Meanwhile the jury remains out on Avon’s many new managers. In September alone, for example, Avon announced that Scott Crum became its senior vice president of human resources and chief people officer, Charles H. Noski its new board member, and Jeff Benjamin  its senior vice president and general counsel. Only time can tell how these people will navigate Avon past its travails, but at least they’re out of the gates now with a cleaner slate.

The post GMI Ratings Governance Update | Avon Products, Inc. appeared first on GMI Ratings.

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