Here's Why Northrop Grumman Earned A Failing Grade For Corporate Governance

northrop grumman b2 spirit stealth bomber


Northrop Grumman’s B2-Spirit stealth bomber

GMIratings identifies companies with governance risks, which can lead to stock declines. This article looks at Northrop Grumman Corporation.The purchase of a $5,050,000 home by Northrop Grumman Corporation (NOC) for use by its Chairman/President/CEO recently drew my attention.  This was not part of the company’s relocation assistance for employees being transferred to its new corporate headquarters in Virginia; it was a prior transaction that provided a principal residence in California for Wesley Bush in October of 2010.

Mr. Bush pays $264,000 per annum to rent the property.  He can easily afford it:  his annual pay rose to $4,372,115 in 2010 and to $6,644,412 in 2011.

The item inspired me to look a little deeper into the governance of Northrop Grumman.

I found that GMI Ratings has flagged 24 metrics for environmental, social, and governance issues at Northrop.  These range from the obvious (such as inordinately high Incentive Compensation for the CEO and CFO) to the more subtle (three of the four Audit Committee members have no experience in aerospace/defence). 

In addition, Northrop has a “Very Aggressive” AGR® (accounting risk) score of 8 on a scale of 100, with poor ratios of Operating Revenue to Operating Expense, Inventory to Cost of Goods Sold, and Accounts Receivable to Sales; poor Asset Turnover; and high Goodwill in relation to Total Assets.

At last year’s Annual Meeting, Northrop shareholders put forth a proposal to permit actions by written consent. This was in response to Northrop’s receiving a governance rating of “C” from The Corporate Library (now part of GMI Ratings).  Shareholders recognised that the rating reflected internal risk, and wanted to implement changes to strengthen the company.  The proposal received 54% of the vote, but the Board opposed it.

They had previously opposed a proposal that would have given shareholders the opportunity to ratify executive compensation. 

It’s no surprise that Northrop’s governance score has now plummeted to an “F.”  The surprise would be if shareholders managed to acquire any voice in the policies and practices of the company they own.

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