Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
1
Martha Stewart
INTRODUCTION
This case focuses on the corporate governance aspect of Martha Stewart Living
Omnimedia (MSO), a media empire founded by Martha Stewart. Stewart is a former
model and devoted her career to domestic perfection and luxury. She is the brand icon of
MSO; however, with new technology and the shift of consumer tastes and preferences,
MSO’s business model is receiving serious threats from other competitors.
After a review of the history of Martha Stewart Living Omnimedia, the case
discusses its competition, the legal problem that Martha Stewart encountered, changing
leadership within MSO, Martha Stewart’s questionable compensation, and the future of
MSO. The case concludes with a discussion of MSO’s future at a crossroads.
The case underscores the importance of corporate governance when conditions in
the environment change. An analysis of the separation of ownership and managerial
control, board of directors, and executive compensation will aid in evaluating the future
of MSO. Some analysts suggest that MSO will lose its competitiveness once Martha
Stewart leaves the company; others suggest that the MSO brand has lost its brand image
by going into product lines such as cleaning fluids and dog poop bags. Also, a few
analysts suggest that MSO is a potential takeover target.
This case is ideal for demonstrating the importance of corporate governance. The
following points are to guide a review and discussion of some important concepts.
• Discuss MSO’s corporate governance. Has the company been able to separate the
ownership and managerial control?
• Evaluate the effectiveness of MSO’s board of directors. Have the directors been
able to monitor and control the company?
• Executive compensation is a method of governance mechanisms. Discuss Martha
Stewart’s compensation and evaluate its effectiveness.
• Is MSO in financial trouble? Discuss the possibility of the market for corporate
control. Will MSO become a takeover target?
ANALYSIS
• Discuss MSO’s corporate governance. Has the company been able to separate
the ownership and managerial control?
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
2
Martha Stewart
a firm is to maximize the value of shareholders, it is unrealistic to think that all managers
will act as the owners. However, it is also inefficient that all shareholders should
participate in managerial decision making. Thus it is inevitable to establish a principal-
agent relationship and confront agents’ bounded rationality and opportunism. Agency
theory explains the relations between managers and owners in that there is a potential for
conflicts when the interests of owners and those of managers deviate.
» Rick Boyko: Managing director of the VCU Adcenter, a graduate advertising
program at Virginia Commonwealth University; formerly co-president and chief
creative officer of Ogilvy & Mather, New York. Identified as candidate for the
board by Martha Stewart.
» Frederic Fekkai: Founder of Fekkai, a luxury hair-care product company with
seven hair salons in the United States; founder and brand architect for the Fekkai
brand at Procter & Gamble, which purchased the company in 2008. Identified as a
candidate for the board by Martha Stewart.
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
3
Martha Stewart
• Evaluate the effectiveness of MSO’s board of directors. Have the directors been
able to monitor and control the company?
The MSO’s board of directors has not been effective. At most companies, the
board of directors provide oversight of strategic planning, in some cases by establishing a
strategic planning committee to provide stability and continuity during leadership
transitions. Under the corporate governance structure of MSO, the company’s bylaws
require four committees: audit, compensation, finance, and nominating and corporate
governance. The bylaws also make the board responsible for monitoring the “principal
risk exposures” of the company, and assigned oversight to the audit committee. Directors
received training on risk management during an orientation session.
Year
Amount in
Millions ($)
2012
5.4
2011 5.5
2010 5.9
2009 9.8
2008 7.0
2007 2.1
2006 2.1
2005 2.2
Martha Stewart’s Compensation
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
Two weeks before Stewart reported to a minimums security federal prison camp
in West Virginia to begin serving her five-month prison sentence, the newly reconstituted
board renewed her employment contract through 2009. Her base salary was continued at
$900,000, with a bonus of up to 150 percent of salary. Eventually, the tensions between
Stewart and Patrick ran high and the board fired Patrick.
• Executive compensation is a method of governance mechanisms. Discuss
Martha Stewart’s compensation and evaluate its effectiveness.
Executive compensation is one of the governance mechanisms that seek to align
the interests of managers and owners through salaries, bonuses, and long-term incentives
such as stock awards and options. However, in recent decades, executive compensation
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
5
Martha Stewart
There are many factors that can complicate executive compensation. They are:
» Strategic decisions by top-level managers are complex, non-routine and affect the
firm over an extended period, making it difficult to assess the current decision
effectiveness
In order to evaluate the effectiveness of Martha Stewart’s compensation, one
should know that:
» Strategic decisions are complex: Martha Stewart’s compensation is not only based
on MSO’s profits, but also on the use of her home and image. She is basically the
face of the company. Thus, her compensation goes beyond how well the company
is doing.
Based on this analysis, Martha Stewart’s compensation is not an effective
governance mechanism.
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
STRATEGY
• Is MSO in financial trouble? Discuss the possibility of the market for corporate
control. Will MSO become a takeover target?
From the financial statements in the case study, we can see the changes of MSO’s
total revenue as below:
It is very clear from the financial statements that MSO is in financial trouble.
From 2008 to 2012, the total revenue has been decreasing every year. The market for
corporate control is an external governance mechanism that is active when a firm’s
internal governance mechanisms fail. As previously discussed, other corporate
governance mechanisms such as board of directors and executive compensation have
Year
MSO’s Total
Revenue, in
Millions ($)
Growth from
Last Year
2012
197.6 -10.75%
2011 221.4 -4.07%
2010 230.8 -5.72%
2009 244.8 -13.89%
2008 284.3 -13.30%
2007 327.9 13.74%
2006 288.3 35.73%
2005 212.4 13.34%
2004 187.4 -23.76%
2003 245.8 -16.68%
2002 295.0 2.22%
2001 288.6 2.23%
2000 282.3 22.85%
1999 229.8 29.68%
1998 177.2 NA
MSO Total Revenues
Corporate Governance at Martha Stewart Living Omnimedia:
Not “A Good Thing”
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Martha Stewart
» Address weak internal corporate governance
» Correct suboptimal performance relative to competitors
» Discipline ineffective or opportunistic managers